Asia's stock market rally paused on Tuesday and the euro sputtered after five days of gains as it struggled to break through a resistance after a downgrade of Greece's credit rating reminded investors that Europe's debt crisis was not over.
Although Moody's 4-notch downgrade of Greece's rating to Ba1 had been expected, as it was catching up with rival Standard & Poor's BB-plus rating, the move gave investors an excuse to book profits after shares hit a month high on Monday.
European shares were expected to fall at open with Britain's FTSE 100 <.FTSE> seen 0.6 percent lower, Germany's DAX <.GDAXI> seen half a percent weaker, and France's CAC-40 <.FCHI> down by as much as 0.4 percent.
Markets were expecting the downgrade but it does bring attention back to the economic realities in Europe, said Mark Konyn, who oversees about $11 billion as Asia-Pacific chief executive of RCM, a unit of Allianz Global Investors.
The worrying aspect is how they can create an apt balance between managing the debt and implementing fiscal austerity which will not threaten growth overtly.
The euro, which gained strongly in the last few sessions, saw its rally losing steam with the single currency failing to breach an important resistance on charts.
Wall Street surrendered gains on Tuesday after the Greek downgrade, ending little changed in low volume on lingering worries that the euro zone's problems may hamper the global economic recovery.
Global stocks had rallied earlier on data showing euro zone industrial output surged in April, achieving the biggest year-on-year percentage gain in almost two decades.
RCM's Konyn said investors were seeing big risks in investing in Europe and that was affecting risk appetite generally.
The Australian dollar pulled back further from a one-month high versus the U.S. dollar as traders reduced demand for higher-yielding currencies after minutes of an Australian central bank meeting confirmed the market view that interest rates will be on hold at least for the next month.
In Asia, Tokyo's Nikkei share average clawed back from its initial fall to trade flat <.N225>, but stayed around its 25-day moving average, a psychological resistance level.
The MSCI index of Asia Pacific ex-Japan stocks <.MIAPJ0000PUS> was down half a percent at 385.52 by 0645 GMT, after falling as much as 0.6 percent. That halted a five day winning streak, as sectors like resources <.MIAPJMT00PUS> and energy <.MIAPJHC00PUS> weighed.
The euro was at $1.2204, down 0.1 percent from late New York trade on Monday, retreating further from the previous day's high of $1.2298 on trading platform EBS.
It had gained 0.9 percent on Monday when it rose to as high as $1.2298 and well above a four-year low of $1.1876 hit last week.
Much of the gains of late have been fueled by traders covering their short bets against the currency, but dealers said the single currency was still vulnerable to any bearish news from the euro zone.
The euro would need more than short-covering to move decisively up from here, said a senior trader at a Japanese securities house, adding that the market still looked vulnerable to euro-negative news given shaky equity markets.
The Australian dollar, which has benefited from a gradual return of investors to riskier assets in recent sessions, was hurt by expectations that the central bank would keep interest rates unchanged at 4.50 percent in July.
Minutes for the Reserve Bank of Australia's June policy meeting showed members had thought previous rate rises gave it time to see if Europe's troubles would hurt world growth, and to wait for more information on domestic inflation.
The Aussie fell 0.2 percent to $0.8564, extending its pullback from a one-month high of $0.8665 the previous day when an overall improvement in risk appetite supported demand for higher-yielding currencies.
There were some positive takeaways from Moody's downgrade.
A small crumb of comfort is that the stable outlook should mean no further ratings changes from Moody's over the next 12-18 months, at least, said Standard Chartered Bank in a note.
Another positive point is that changes to ECB rules mean that Greek debt is still eligible to be used as collateral, albeit with a haircut and will continue to be eligible even if the Fitch Rating also moves to junk, the note said.
Fitch Ratings has rated Greece at BBB-minus, the lowest in the investment grade category, with a negative outlook.
Crude oil futures were steady above $75 a barrel amid worries about the effect of Europe's debt crisis on the demand for oil.
(Additional reporting by Satomi Noguchi in TOKYO; Editing by Jan Dahinten)