By: Barbara Zigah

Following yesterday’s steep sell-off of the Euro on the announcement that Portugal’s debt rating was to be downgraded, the Euro managed to edge up against the U.S. Dollar on short-covering. Moody’s, the credit ratings agency, has followed through on earlier threats and downgraded Portuguese debt to junk status. The reverberations were immediately felt in the financial markets as fear of contagion spread, and the only factors which helped to stem the risk aversion spread was support for the Aussie and Kiwi.

One forex researcher in Japan shared his view that the markets dodged a bullet, noting that Portugal’s downgrade doesn’t effectively change the fundamentals, which is why the reaction was limited. On the other hand, he noted had it been Spain the story would have been very different.

As reported at 2:38 p.m. (JST) in Tokyo, the Euro was trading against the greenback at 1.4460, a gain of 0.2% following yesterday’s 1% drop to $1.4395. Most analysts expect the EUR/USD pair to trade in the 1.40 to 1.45 range until early August when the U.S. debt ceiling issues are finally resolved. The U.S. Dollar Index, a gauge of the greenback’s strength against other major currencies, struck resistance yesterday and was firmly entrenched at 74.499 .DXY.