RTRS: Euro flat but vulnerable as markets wind down
(Reuters) - The euro was little changed against the dollar on Friday in thin holiday trade but with the euro zone crisis unresolved, investors remain likely to sell the single currency again in 2012.
The euro was also little changed on the week, the last full week of trading for the year, after two weeks of declines, and analysts cautioned any gains will only prompt more selling as investors unload risk.
Another promising initial jobless claims report on Thursday has helped bolster optimism surrounding the U.S. economic recovery, in sharp contrast to the doom felt in Europe and as monetary and political authorities struggle to resolve the sovereign debt crisis and hold the euro zone together.
"Three back-to-back weekly jobless claims reports showing improvements in the U.S. but in Europe unfortunately we are not quite seeing that," said Greg Salvaggio, vice president of currency trading at Tempus Consulting in Washington. "The theme next year is euro down, euro down, euro down."
The single currency was little changed for the day at $1.3045, holding above a recent 11-month low. It is down around 2.5 percent on the year.
Traders highlighted some stop-loss orders in the $1.3120 region, which if hit could push the euro higher in thin markets. The session peak posted at $1.3095.
SOVEREIGN THREAT
But with the threat of sovereign downgrades hanging over the bulk of the euro zone, sentiment towards the single currency remains bearish heading into the new year, with the liquid dollar likely to be supported.
Two independent European government sources told Reuters on Friday that Standard & Poor's is not expected to release its verdict on debt ratings for 15 euro zone countries until January.
Doubts over whether this week's huge European Central Bank tender of cheap loans will be effective in easing the strain for troubled euro zone economies are likely to keep peripheral sovereign bonds under pressure.
Italian bonds in particular are expected to come under renewed strain as the country faces a major refinancing hurdle early in the new year.
Many market participants say heavy buying of Italian and Spanish debt by the ECB is required to ease concerns over the precarious finances of the two countries.
Departing ECB Executive Board member Lorenzo Bini Smaghi said on Thursday the ECB was able to scale up its actions if needed and said quantitative easing could be an option.
"The lower-than-desired growth rates in broad money and credit and the downside risks to price stability will likely be the catalyst in driving the ECB to increase its bond buying program early next year and will be presented as a way to counteract them," said BNP Paribas in a note.
BNP recommended selling into any year-end rally for the euro and highlighted the $1.32-1.3250 area as tough resistance.
LOW EXPECTATIONS
Morgan Stanley analysts expect the euro to be among the worst performing G10 currencies next year as the deteriorating economic outlook in Europe, continued ECB easing and liquidity measures, together with portfolio outflows, weigh on the currency.
A break below $1.2945 in the euro would open up a test of the 2011 trough, traders said.
The euro was hovering near all-time lows against the Australian dollar on diverging economic fundamentals between Europe and Australia. Analysts expected the euro to continue to lag the risk-sensitive Aussie should asset markets rally in 2012.
Against the safe-haven Swiss franc, the euro was steady at 1.2227 francs, not far from the cap of 1.20 introduced by the Swiss National Bank in September.
The U.S. currency stayed supported at 78.05 against the yen.
