Thursday February 22 5:43 PM ET
Yen Slumps on S&P Japan Downgrade

By Lida Poletz

NEW YORK (Reuters) - The yen tumbled to 1-1/2 week lows against the dollar on Thursday after Standard & Poor's ratings agency downgraded Japan's debt rating, citing sluggish reforms in the world's second biggest economy.

Traders said the rate cut had caught the market off guard in thin late U.S. dealing, although speculation of a downgrade had been in the market for months.

``It's a short-term negative in the market,'' said Jay Bryson, global economist at First Union Corp. ``(But) given that there've been some indications they were going to do this, it's not a huge surprise.''

S&P said it was cutting the long-term local and foreign sovereign debt rating for Japan to AA+ from AAA, citing the country's rising debt levels, the slow pace of fiscal reforms and budgetary constraints.

The dollar quickly racked up around 2/3 of a yen to hit a fresh session peak at 117.18 yen, its highest since Feb. 13, according to Reuters data. It closed near its peaks at 117.06, up nearly -- half a percent on the day.

The euro also flipped higher against the Japanese currency, erasing heavy early losses to close at 105.95 yen (EURJPY-), little changed from the prior close.

Euro Under The Gun

But the euro remained weaker against the dollar, after tumbling earlier in the session to two-month lows against the dollar in the wake of Turkey's lira currency float.

Market concerns about European bank exposure to Turkish assets helped push the euro -- already trending lower this week -- to fresh troughs, analysts said.

``The knee-jerk selling was concern about European bank exposure to Turkey, which is viewed as a negative,'' said Lisa Finstrom, senior currency strategist at Salomon Smith Barney.

According to estimates by the Bank of International Settlements, German commercial banks hold some $12 billion (10.84 billion euros) in Turkish debt, which makes up about 1 percent of their total foreign exposure.

Turkey's aspirations to eventually join the European Union pushed the euro lower, traders said.

``If the future of the euro is going to be an amalgamation of currencies like the Turkish lira, when is this thing going to be strong?'' said David Gilmore, partner at Foreign Exchange Analytics.

Turkey's drastic move came after several days of financial and political turmoil, in which Turkish shares plunged 29 percent over three days while money rates shot above 4,000 percent. However, on Thursday, Turkish shares surged after some investors took a positive view of lira float.

Early in the U.S. session the euro extended its recent losses to trade as low as 90.17 cents, its weakest since Dec. 20. The euro also weakened against the yen, Swiss franc and sterling as ripple effect took hold.

Still, losses on Wall Street stocks helped the European common currency pare its losses. A selloff in U.S. technology shares took some of the shine off the dollar and the euro managed to recover from its lows, closing at 90.48 cents, down nearly half a percent on the day.

Traders said the euro's inability to capitalize on good news earlier this week had soured sentiment against it.

On Wednesday, a brief euro rally stalled and reversed despite falls in U.S. technology stocks, a spike in a U.S. inflation index, and robust data out of Germany.

``Before, when the euro was in a better light, the data would have been viewed as kind of positive,'' said Ralph Delzenero, a trader at Bank One N.A. in Chicago. ``Now people are shrugging their shoulders and saying: 'Show me more.'''

In that environment, stronger-than expected French consumer spending data provided little support to the euro on Thursday. French consumer spending jumped 3.2 percent month-on-month in January for a 5.0 percent gain on the year.

Traders speculated that should the single currency slide below 90 cents, a move toward 88.50 cents and lower was likely, further dimming the prospects for a euro recovery to parity with the dollar.

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