The euro has come under pressure after ratings agency Moody's downgraded Anglo Irish Bank's senior debt.
The agency cut its rating for the bank's unguaranteed senior debt by three notches to Baa3, one notch above junk status, ahead of moves later this week by Dublin to outline the cost of its bank bail-out. This currently stands at €22bn but the final figure could be nearer €35bn.
Moody's said it expected the government to support the senior debt, but the bank's rating would be under review until a decision was made. In a statement, Moody's analyst Ross Abercromby said:
Moody's expects a continued asset quality deterioration in the loan book of Anglo Irish that will require further government support for the bank's liabilities.
While Moody's considers the likelihood of the government not supporting this debt to be very small, this risk has been reflected in the three notch downgrade.
The euro has slipped around 0.35% on the day to $1.3441 after touching $1.3426 on the Moody's news. The downgrade has reawakened worries about the state of European sovereign debt, which investors had managed to push to the back of their minds at the end of last week. Kathleen Brooks, research director at Forex.com, said:
The 1.35 level could prove a significant hurdle this week as concerns about the health of the banking sector come to the fore. Firstly, the ECB is due to rollover €225bn of loans this week, the largest amount since July. The markets will use this as a litmus test to see how much "emergency" support the ECB can withdraw without causing a liquidity crunch for Europe's troubled banking sector.
Secondly, on Thursday the Irish government will announce the final cost of winding up Anglo Irish bank. This should add certainty to the markets about the size of Dublin's liability to the financial sector, which has been missing in recent months.
