Euro Declines After Ireland's Credit Is Cut by S&P; U.K. Pound Strengthens

By Emma Charlton - Feb 2, 2011 9:23 PM GMT+0800

The euro fell against the dollar for the first day in three after Ireland’s credit rating was cut by Standard & Poor’s, reviving concern that Europe’s sovereign-debt crisis may worsen.

The single currency fell from a 2 1/2-month high against the greenback and erased its gains against the yen. Ireland may be downgraded further after its rating was lowered one level to A- from A, S&P said. The pound rose against the dollar for a third day as data showed British construction picked up and a Bank of England policy maker said borrowing costs should be increased. South Korea’s won led gains by Asian currencies on optimism quicker global growth will boost the region’s exports.

“I don’t think the downgrade is a huge surprise, but clearly it has brought sovereign-debt concerns back to the market’s attention and taken some of the upward momentum out of the euro,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

The euro fell 0.2 percent against the dollar to $1.3805 at 8:18 a.m. in New York. Earlier it rose to $1.3862, the highest level since Nov. 9. Against the yen, the single currency was little changed at 112.44 per euro after rising as much as 0.4 percent earlier.

The negative outlook reflects “our view of the uncertainties surrounding the size of Ireland’s additional capital needs for its largely state-owned financial sector,” S&P said.

Dollar Index, Pound

The euro stayed lower versus the dollar after U.S. data showed stronger job growth than economists forecast. ADP Employer Services estimated U.S. companies added 187,000 workers to their payrolls in January, above the 140,000 median estimate in a Bloomberg survey.

The Dollar Index, which tracks the currency against six of its peers, was little changed at 77.129.

Britain’s pound strengthened for a third day against the dollar, rising 0.4 percent to $1.6205, the highest since Nov. 5. It appreciated 0.4 percent to 85.30 pence per euro.

A gauge of building activity in January, based on a survey of purchasing managers rose to 53.7 from 49.1 the previous month, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said today. That beat the median forecast of 49.5 from 11 economists in a Bloomberg survey. A measure above 50 indicates expansion.

Sterling `Force'

Andrew Sentance, a member of the Bank of England Monetary Policy Committee, told the City A.M. newspaper interest rates must be raised now at a steady pace to avoid a large increase later. Sentance, who voted for a rate increase at the bank’s last meeting, said Britain will face difficulty stabilizing prices should the “inflation genie get out of the bottle.”

“The fact that we are getting members of the Monetary Policy Committee coming out and making their feelings about fighting inflation clear has been an upward force on sterling,” saidSimon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London.

South Korea’s won strengthened 1.4 percent to 1,101.70 per dollar, while the Philippine pesogained 0.6 percent to 43.975 per dollar. The MSCI Asia Pacific Index of regional shares rallied the most since Dec. 2, adding 1.3 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net