* Key retracement level offers euro support
* Market players turn back risk trades slightly
* Euro shrugs off downgrades of Ireland
By Hideyuki Sano
TOKYO, Nov 24 (Reuters) - The euro edged up from a two-month
low on Wednesday, finding support after a massive sell-off
sparked by the euro zone debt crisis and heightened tensions in
the Korean Peninsula.
The common currency ticked up on light buying after its fall
of 1.9 percent to as low as $1.3359 <EUR=> on electronic platform
EBS prompted short-covering.
As the low represented a 38.2 percent retracement of the
euro's rally this year to $1.4283 in early November from $1.1876
in June, the euro may have found short-term support there, said
Sumino Kamei, a senior analyst at the Bank of Tokyo-Mitsubishi
UFJ.
The euro climbed 0.2 percent to $1.3395 on the day, shrugging
off the news that Standard and Poor's had downgraded its
sovereign rating on Ireland. []
"The fact that the euro didn't fall further on the downgrade
suggests that the euro's drop may be over at least for the short
term," Kamei said.
Market players' risk aversion also eased as the Korean won
<KRW=KFTC> recovered from lows and regional shares fared better
than some investors had feared a day after North Korea fired
scores of artillery shells at a South Korean island.
While few traders dare to predict what North Korea will do
next, many are leaning to the view that the incident will not
have a long-lasting impact on financial markets unless tensions
escalate sharply.
"I think this is already over as a market factor," said a
trader at a Japanese brokerage house, noting that sporadic
attacks from Pyongyang in the past have tended to only affect
markets for a day or two.
Easing risk aversion also helped the Australian dollar
<AUD=D4> gain 0.7 percent from late U.S. levels to $0.9795, a
halfway recovery from Tuesday's fall to a four-week low of
$0.9708.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TAKE A LOOK-Korea situation []
Risks to watch on Korean peninsula []
Fed pondered radical policy steps []
TAKE A LOOK-Europe debt problems []
Multimedia on Euro Zone crisis http://r.reuters.com/hus75h
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The dollar was little changed against the yen at 83.20 yen
<JPY=>, with its 55-day moving average, now at 82.74, seen as a
floor and with the 90-day moving average, at 83.82, seen as a
ceiling in the near term.
Traders said market liquidity was lighter than usual due to a
U.S. market holiday on Thursday, which means prices can be
exaggerated in either direction.
Some traders said the euro still had a greater risk on the
downside given worries Spain and Portugal may have to follow
Ireland in seeking emergency aid to stave off debt crises.
"Perhaps the market may already be expecting Portugal to ask
for some sort of help. But if Spain also needs a rescue, that
would be a big blow to the euro," said Ayako Sera, market
strategist at Sumitomo Trust and Banking.
TAKING AIM
Investors took aim at Spanish government bonds on Tuesday,
driving the premium over German benchmarks to a euro lifetime
high after Madrid was forced to pay a high cost to sell
short-term bills.
"Contagion from the Irish situation during the last few
months was largely limited to Greece and Portugal. Not any more,"
wrote Matthew Strauss, strategist at RBC Capital Markets, in a
note.
There is also fear that a deepening political crisis in
Ireland could derail the financial rescue to recapitalise the
country's banks and fund its public finances.
German Chancellor Angela Merkel also added fuel to fire by
saying the euro was in an "exceptionally serious" situation.
For now, the euro has key support in the $1.3333 area, its
August high. A break of that level could pave the way for a
retest of $1.3232, a 61.8 percent retracement of its
August-November rally, before $1.3000.
On the flipside, the dollar index <.DXY> <=USD> is tackling
major resistance at 79.55-80.05. It fell 0.2 percent to 79.51 on
the day, but was still not far from an eight-week high of 79.743
plumbed on Tuesday.
A break of this area will put the index above its 200-day
moving average and could signal a medium-term rally in the
dollar, which had been pummelled until early this month by the
outlook of more money printing by the Federal Reserve.
The dollar gave a muted reaction to minutes from the Federal
Reserve's last policy meeting that showed officials considered
even more drastic options to boost growth before it settled on
buying $600 billion in Treasuries. []
(Additional reporting by Ian Chua and Reuters FX analysts
Krishna Kumar in Sydney; Editing by Joseph Radford)
