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Euro steady, focus on Switzerland and Spain

Source: Reuters - Thu 15th Dec 2011

The euro steadied just off new 11-month lows on Thursday, with eyes fixed on a Swiss National Bank (SNB) meeting to consider its campaign of currency intervention while a Spanish bond auction will offer more signs on the depth of Europe's debt crisis.

The prospect of more sovereign ratings downgrades and a gloomy outlook for the euro zone economy after two-years of turmoil has depressed demand for European stocks and much of the region's debt, prompting safe-haven buying of the U.S. dollar, Treasuries and German government bonds.

"Overall, the outlook for the euro remains dark, with the unravelling of the treaty last week, refusal to lend to the IMF and the overall downside risks to global growth," said Paul Robson, currency strategist at RBS Global Banking.

"We expect the euro to fall to $1.26 by the end of Q1 next year."

The Swiss central bank is not expected to do much but some investors are worried that the recent fall in the euro could prompt it to raise the permissable exchange rate with the franc.

The SNB set a cap of 1.20 francs to the euro on Sept. 6 to try to shield the economy from recession, after investors seeking a safe-haven from the euro zone debt turmoil almost pushed the unit to parity against the single currency in August.

There is no sign of the surge in inflation which the intervention policy risks, rather Switzerland is increasingly threatened by a downward deflationary spiral.

"Speculation remains intense that the SNB will act by lifting the euro-Swiss floor higher, possibly towards 1.2500," Credit Suisse analyst Koon How Heng said in a note.

The Spanish bond auction is also key after a rise in Italy's borrowing costs on Wednesday sent the euro down and depressed equity markets.

The government plans to issue up to 3.5 billion euros in debt maturing in Jan 2016, April 2020 and April 2021 but they are likely to pay 2 percentage points less to shift five-year paper than Italy did on Wednesday.

Flash euro zone, German and French PMIs for December are likely to paint a grim picture.

A private sector survey out earlier indicated China's factory output will shrink again in December, adding to the headwinds facing a global economy struggling with sluggish U.S. growth and the euro zone's problems.

"We're quite bearish about the world at the moment," said Damien Boey, equity strategist at Credit Suisse in Sydney. "You're looking at basically the three major economies in the world causing problems."

European shares stated slightly firmer but were expected to have a mixed day as liquidity dries up ahead of the year end. The FTSEurofirst 300 index was up about 0.3% in early trade.

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