By: Barbara Zigah

The Euro is holding onto modest gains during the late Asian trading with hedge fund operators trimming their short positions ahead of an E.U. policymaker conference call which could yield some surprises for the market. Eurozone confidence remains fragile, evidenced by Tuesday’s Italian bond auction; Italy will be required to pay an unprecedented interest rate on their newly issued 5-year bonds. As reported at 12:07 p.m. (JST), the Euro was trading against the U.S. Dollar at $1.3690, off the 7-month low of $1.3495 struck on Monday.

Investors expect that the common currency will be under pressure again today, given the recent credit downgrade of two key French lenders, Societe Generale and Credit Agricole. A third, BNP Paribas, will keep their current rating but Moody’s warned that they are under review for a downgrade. French banks have a significant exposure to Greek debt, and with the prospects of a Greek default growing every day they are even more vulnerable.

Later this week, the U.S. Secretary of the Treasury, Timothy Geithner, is to travel to Poland to meet with European Union finance ministers. That sends the signal to markets that Washington is clearly worried over the escalation of troubles in the Eurozone.