LONDON—The Japanese yen slipped slightly against the dollar Tuesday after Fitch Ratings slashed the country's credit worthiness by two notches.
The euro held steady against peers as investors waited for Wednesday's summit of European leaders in Brussels to see if there's a shift in emphasis between pursuing an austerity agenda and following policies more geared towards growth.
The euro recently traded at $1.2751 compared with $1.2818 late Monday in New York. It traded at ¥101.60 from ¥101.66 and at 1.201 Swiss francs compared with 1.2012 francs. The pound was trading at $1.5770 from $1.5835.
The dollar jumped to a Tuesday high against the yen of ¥79.85 from ¥79.58 before the announcement Fitch changed Japan's rating to A-plus from double-A, citing rising public debt ratios and a deteriorating credit profile. The yen continues to enjoy support form global investors seeking shelter from the euro-zone debt crisis and Fitch's decision was seen as isolated by investors. The currency reaction was muted.
"There could be some impact if Moody's and S&P follow suit and cut their ratings to A levels," said Takafumi Yamawaki, chief rate strategist at J.P.Morgan in Tokyo. "I don't think that will happen in the near future."
Wednesday's meeting of European Union leaders may highlight French and German differences in how to quell the 17-nation euro zone's debt crisis. It threatens to force Greece, beset by political upheaval and concerns it won't meet conditions for bailout financing from international lenders needed to keep it afloat, from the currency bloc.
François Hollande, elected this month as France's first socialist president in 17 years, pledges to steer Europe onto a path of growth, diluting the austerity of government spending cuts and restructuring championed by German Chancellor Angela Merkel.
"Germany could quickly learn that there is a slow power shift from creditors to debtors taking place," said Morgan Stanley in a research note. The argument for more growth-orientated policies was underlined by the Organization for Economic Cooperation and Development, which cut economic growth forecasts for the euro-zone for both 2012 and 2013.
Sterling fell against the greenback and held its own against the euro after U.K. data showed annual inflation slowed more sharply than expected in April to 3%, increasing the likelihood of more stimulus from the Bank of England to lift the country's recessionary economy.
"The fall gives the [BOE's] Monetary Policy Committee a bit more leeway to undertake further quantitative easing to cushion the U.K. economy from the turmoil in the euro-zone," said research house Capital Economics in a note to clients. The pound was recently trading at $1.5770 from $1.5835.
Emerging-market currencies were steady in quiet trade. Speculation about Polish central bank intervention persisted and the Indian rupee hit fresh record lows against the dollar.
The dollar pushed ahead against the Brazilian real, trading dangerously close to the central bank's 2.05 line in the sand.
—Francis Bray, Laura Clarke and Megumi Fujikawa contributed to this article.
