TOKYO Nov 21 (Reuters) - The euro held steady in Asia on Monday after a short-squeeze rally late last week, with market players looking for more clarity on how Europe plans to stop the rapid erosion of confidence in its sovereign debt.
The euro was helped slightly by the dollar coming under mild pressure with a U.S. congressional "super committee" expected to formally announce on Monday the failure of its three-month-long effort to forge a $1.2 trillion deficit reduction plan.
Still, many players remained nervous of holding the euro, unsure how policymakers can bring down the borrowing costs of many euro-zone governments from current elevated levels.
The euro drifted to $1.3513, down 0.1 percent from $1.3519 late in New York and well off Friday's peak of $1.3614.
Many traders see limited upside. A move towards $1.3600 would be seen as a selling opportunity, while key support is at the base of the weekly ichimoku cloud on charts at $1.3407, they said.
Against the yen, the euro was steady at 103.96 yen .
"Essentially the euro needs a stronger European economy so as to reduce fiscal deficits. For that to happen, the euro has to fall," said Minori Uchida, a senior analyst at Bank of Tokyo Mitsubishi UFJ.
The centre-right's crushing victory in Spain could give the People's Party a freer hand in bringing in even harsher austerity measures to appease financial markets. Yet markets found little else to cheer from events in Europe.
Analysts at Barclays Capital said the European Central Bank's unwillingness to commit to large-scale bond purchases and Europe's deteriorating economic backdrop mean global financial markets will remain hostage to stresses in Europe.
"In this environment, we continue to favour being defensive in currency markets," they said in a note, suggesting being long the dollar versus European currencies.
"Being short EUR/USD has been frustrating for several reasons, notably the repatriation of European bank exposures abroad ... we therefore prefer to be long the USD versus cyclical European currencies that are directly exposed to the euro area such as the SEK (Swedish crown)".
The European Commission will propose on Wednesday much tighter control of euro zone countries' budgets and closer economic monitoring which, if proven to work, could lead in a few years to some form of joint euro bonds, a senior euro zone official said.
While such a move could help bolster confidence in the longer term, few think such drastic measures could be taken given Germany's staunch opposition to the idea.
CRUCIAL WEEK
This week is also shaping up to be crucial for Greece's new prime minister, Lucas Papademos, who has to convince the IMF and the EU to give his country the 8 billion euros it needs to avoid a mid-December default.
Back home, the conservative party leader, one of his coalition backers, refused to give a written pledge to support reforms, and a public sector union geared up for strikes.
But a different drama is being played out across the Atlantic, as a U.S. congressional deficit-reduction committee looks set to fail to deliver a deal to slash $1.2 trillion in federal spending over 10 years by Wednesday's midnight deadline.
Barring an unforeseen development, the Republican and Democratic heads of the 12-member "super committee" will issue a joint statement conceding failure, aides told Reuters.
The U.S. dollar also slipped against the yen by 0.15 percent to 76.77 yen, edging closer to Friday's dip to 76.58, a post Oct. 31 intervention low.
But wariness about currency intervention by Japan is likely to keep the dollar above its record low of 75.311 for the time being, market players said.
Some market players said the impact of a failure by the U.S. deficit panel might be smaller than in August, when Congress's failure to reach a deficit cut deal led Standard and Poor's to downgrade its rating on U.S. debt.
"Even if there's no deal, that would not automatically lead to a downgrade, so I don't think this is going to cause a hullabaloo," said Makoto Noji, a senior analyst at SMBC Nikko Securities.
But since failure to reach a deficit cut deal could result in painful automatic spending cuts from 2013, some market players expect investors to cut their forecasts for U.S. growth, which would further undermine their risk appetite.
"With fiscal problems both hurting the dollar and the euro, you can say at least that this is not something that encourages risk appetite," Noji said.
Indeed, the risk-sensitive Australian dollar was the biggest loser in early Asian trade, hitting six-week low against the U.S. dollar and five-week trough against the euro, ironically, despite Australia having much sounder public finances than many European countries.
Market players were getting out of their Aussie long positions ahead of the year-end after having bought the Aussie constantly as an alternative investment as the U.S. and European economies have struggled.
