Dollar flat; euro weakens as Italy sells debt

SAN FRANCISCO (MarketWatch) � The euro stumbled more than 1% on Friday after Standard & Poor�s stripped France and Austria of their coveted triple-A ratings and cut seven other euro-zone sovereign ratings.

S&P slashed Cyprus, Italy, Portugal and Spain by two notches and Malta, Slovakia and Slovenia by one notch.

The euro EURUSD �slid over 1% to $1.2677 versus $1.2826. It had dipped slightly further after the announcement but the currency soon bounced back. The euro fell 0.4% for the week, extending losses for the third week in a row.

The dollar index DXY , which tracks the U.S. unit against a basket of six major rivals, advanced to 81.459 from 81.313 in North American action late Thursday. The greenback posted a weekly gain of 0.3%.

Following their one-notch downgrades, France and Austria are now both AA+. Italy is rated BBB+, Spain is at A and Portugal�s rating has been pushed into junk territory of BB. See pulse on S&P�s euro-zone downgrades

For the time being, Germany, Finland, Luxembourg, and the Netherlands kept their triple-A ratings.

/quotes/zigman/4867933/sampled EURUSD 1.2237, -0.0032, -0.2586%

�In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,� said S&P in a statement.

It also noted that the long-term outlooks on 14 euro-zone ratings-- including France, Italy, and Spain -- are negative, suggesting that there is at least a one-in-three chance that there will be another round of downgrades in 2012 or 2013.

Earlier, the euro had rallied in expectation of a strong performance after a sale of Spanish government bonds and short-term Italian debt attracted strong demand on Thursday, said Nick Stamenkovic, fixed-income economist at RIA Capital In Edinburgh.

Click to Play Stocks drop on Europe downgrade

Stocks ended lower on expectations a credit downgrade of several euro-zone countries and disappointing results from J.P. Morgan Chase. Jonathan Cheng has details on The News Hub. Photo: Reuters

The euro had hit an intra-day high of 1.288 before being battered by reports of S&P�s decision that broke near the start of the U.S. trading day.

The euro, which saw some support around 1.2650, is expected to remain under pressure in the near term and may drop to 1.20 by the end of the first quarter, according to Dan Dorrow, head of research at Faros Trading.

The British pound GBPUSD �traded at $1.5316 versus the dollar, slipping from $1.5340. The euro EURGBP �fell versus sterling to fetch 82.71 pence.

The dollar traded at 76.90 yen versus the Japanese currency USDJPY , firming from �76.77 previously.

Japanese Prime Minister Yoshihiko Noda shook up his cabinet Friday, replacing five ministers. Finance Minister Jun Azumi retained his position. Read more: Japanese prime minister reshuffles cabinet.