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FOREX-Euro drops as debt fears outweigh action on US

Published 04/18/2011, 01:46 PM
Updated 04/18/2011, 01:48 PM
TAHS
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* Euro falls most vs dollar since Nov on euro zone debt

* S&P revises U.S. long-term rating outlook to negative

* Newspaper says Greece asked IMF/EU to restructure debt

* Finnish vote result sparks uncertainty on Portugal

(Updates prices, adds quotes, adds graphics)

By Julie Haviv

NEW YORK, April 18 (Reuters) - The euro suffered its worst one-day drop since November against the dollar on Monday as concerns mounted that Greece will be forced to restructure its debt and anti-aid sentiment in Europe showed signs of growing.

Rampant risk aversion generally weighed on the euro zone single currency even as Standard & Poor's revised its outlook on the United States' long-term rating to negative from stable but affirmed its 'AAA/A-1+' sovereign credit rating.

An actual ratings downgrade of U.S. debt would be negative for the U.S. dollar, but most believe S&P's announcement was a warning and therefore did little to rattle the greenback's performance against the euro.

"The key takeaway from the S&P announcement is that the U.S. has been put on notice, but no ratings action are likely until 2013," said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman in New York.

"With no one expecting any serious progress on deficit reduction until after the 2012 election, S&P seems to be simply firing a shot across the bow to U.S. policymakers," he said.

While U.S. fiscal tensions are increasing, the United States is far from defaulting on its debt.

"The prospect of an actual default by the U.S. on debt issued in its own currency isn't a realistic worry, in a financial market that has a lot more real worries to deal with (including genuine euro zone default risks)," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

"We are less concerned over a downgrade to the outlook than we are about the growth implications of turning to fiscal belt-tightening before the economy has self-sustaining momentum."

The euro was last trading down 1.4 percent at $1.4234, with the session low at $1.4155 -- a two-week low -- according to Reuters data. It was the biggest fall since a 1.86 percent decline on Nov. 23.

German government sources said they expected Greece will not make it through the summer without debt restructuring, although Athens denied a debt rescheduling was imminent.

The euro's rise has stalled since it hit a 15-month high last week, though market players expect it to be supported by prospects of another rise in euro zone interest rates.

Earlier, a Greek newspaper reported that Greece had told the IMF and the European Union this month it wants to restructure its debt. Greek debt pared losses as a finance ministry source in Athens said the story was untrue.

Players also monitored Portugal's progress toward a bailout after strong gains in a weekend election in Finland by an anti-euro party that has vowed to veto the rescue package.

Analysts doubted the Finnish vote could do more than slow down a bailout, but the result of the vote added to negative euro sentiment, encouraging investors to cut long positions.

"The real fear is that anti-euro aid sentiment is building across Europe, which, should it spill into countries like Germany, could have significant ramifications," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

NEGATIVE OUTLOOK

Standard & Poor's cited huge budget deficits and rising government indebtedness as the reason for the U.S. outlook revision, with the path to addressing those issues unclear.

The euro fell to its lowest in almost three weeks against the yen. It last traded at 117.26 yen, down 2.2 percent.

Euro/yen fell below a cluster of support in the 119.20 yen to 119.30 yen area that coincides with some intraday lows hit in April. A trader for a Japanese bank said the euro could drop toward 115 yen in the near term.

The dollar also hit its lowest in almost three weeks against the yen to around 82.16 yen, before recovering slightly to 82.40 yen, down 0.9 percent on the day. (Additional reporting by Nick Olivari; Editing by Kenneth Barry)

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