The euro pared most of its earlier losses against the US dollar this morning after Italy successfully raised its planned amount in bonds at an auction today.
The euro hit a low of $1.2182 this morning after Moody's downgraded Italy's credit rating. Despite the downgrade, Italy today managed to sell the planned €5.25 billion at a government bond auction.
The average yield on the three-year bond at the sale fell to 4.65% from 5.3% at a similar auction in June. Demand was also stronger, with the bid-to-cover ratio rising to 1.73x from 1.59x in June. A major increase in the yield would have been bearish for the euro as it would have raised contagion fears. The ten-year 2022 bond sold for 5.82%, while the 11-year bond was sold for 5.89%.
Moody's downgraded Italy's sovereign credit rating by two notches to Baa2, just two notches higher than junk status, and warned it could cut the rating further if Italy's access to money markets dried up. The rating cut put significant pressure on the country, coming just hours before the government bond auction.