(Reuters) - The euro pared losses on Tuesday after a smooth Greek treasury bill auction offset the negative effects of an earlier Portugal ratings downgrade. Greece's Public Debt Management Agency (PDMA) sold 1.625 billion euros ($2.03 billion) of 6-month T-bills on Tuesday, its first debt sale since a giant EU/IMF emergency loan backstop agreed in May. "We were expecting a good result, and it's good for Greece and the euro, but Greece has a long way to travel, as its economic challenges are pretty severe." said Paul Robinson, fx strategist at Barclays Capital. "It's going to take years for Greece to figure this out, not just one auction," he added. By 0950GMT (5:50 a.m. EDT), the euro had recovered back to trade close to flat on the day versus the dollar at $1.2585. The shared currency had fallen around 40 ticks to the day's low of $1.2523 when Moody's cut Portugal's debt rating by two notches to A1 with a stable outlook, saying the government's financial strength was likely to weaken over the near term. Traders said range players were the euro buyers around the lows, the same accounts then looking to sell around $1.2640. They noted a major U.S. bank protecting a short-term option barrier at $1.2500. Asian buyers were also reported in the $1.2500 region, while real-money accounts were layering bids from $1.2490. Key resistance for the euro was seen around $1.2687, the trendline from the December high. "While capped by $1.2687, our stance will be negative," Commerzbank technical analysts said in a note to clients. A robust response to a Spanish debt auction earlier this month took the euro to two-month highs. That coincided with worries the United States was heading toward a double-dip recession, sending the greenback to its lowest in nearly two months against a basket of currencies. Those concerns have taken a back seat, but traders said real money investors and margin traders were still cautious, given lingering worries about a global slowdown. DOLLAR INDEX The dollar index was flat on the day at 84.205 .DXY while the U.S. currency was a touch weaker against the yen at 88.47 yen. "Dollar/yen continues to be suppressed by the options market and 87.80 to 89.10 has us contained for now," said a spot trader at a U.S. bank in London. The yen struggled for most of the previous session, after Japan's ruling Democratic Party suffered a stinging defeat in a weekend parliamentary election, but the currency recouped its losses during North American trade. Higher-yielding currencies such as the Australian and New Zealand dollars initially benefited after Alcoa (AA.N) posted a higher-than-expected profit for the second quarter on Monday. But those currencies later gave back gains as Shanghai shares .SSEC closed down 1.6 percent, having fallen more than 2 percent at one point after the government said it would continue to rein in speculation in the country's red-hot property sector. Other Dow heavyweights reporting earnings this week include Intel Corp (INTC.O), JPMorgan Chase (JPM.N) and General Electric (GE.N). (Additional reporting by Naomi Tajitsu, editing by Nigel Stephenson/Ruth Pitchford)

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