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Dollar-euro steady, pound hit by Moody's downgrade

The dollar held firm against the euro Friday following two days of strong gains, after the euro earned only a temporary bump from Germany's buoyant business confidence index.

The yen meanwhile resumed its weakening path, while the British pound dropped in the day after Moody's cut the country's AAA debt rating.

At 2200 GMT, the euro traded at $1.3189, barely changed from $1.3188 late Thursday.

It surged to $1.3242 in early trade after the closely watched Ifo business climate index notched up its strongest gain in two and a half years to hit its highest level since April 2012.

But those gains were lost after the European Central Bank said that the region's weak banks were holding onto much higher levels of ECB emergency funding than previously expected.

There was also caution ahead of Sunday's Italian elections, with the result expected to be a divided legislature as the country struggles with austerity budgets and persistent recession.

Financial markets warned an unclear outcome could plunge the eurozone's third economy back into crisis.

"There is no doubt that investors are exercising a degree of caution ahead of this week's Italian election, with the possibility that we could well see a lot of political gridlock come into play early next week," said CMC Markets analyst Michael Hewson.

The yen's short-lived correction appeared to end, with the dollar rising to 93.37 yen from 93.11 yen and the euro gaining to 123.18 yen from 122.81.

Markets were watching to see who would be named the new head of the Bank of Japan, with the choice a likely indicator of how strongly the central bank will support the government's economic growth stimulus efforts.

Kathy Lien of BK Asset Management said that at the end of the day, whomever is chosen "will come out quickly and reaffirm (the prime minister's) plans to follow through with reaching the government's two percent inflation forecast which will require an aggressive amount of easing and drive the yen lower once again."

The British pound was steady through the day around the $1.5250 line until Moody's announced a one-notch cut in the country's rating to Aa1, citing weak growth and rising debt.

The pound sank to $1.5146, its lowest level since July 2010.

The dollar was at 0.920 Swiss francs, down from 0.9308 francs.