Euro up versus dollar on Spain

 

The euro edged up against the dollar on Friday after Spain announced a slew of measures to control its finances, but analysts said the single currency would stay pressured in 2012 as the region's debt crisis roils on.

Spain's new government outlined spending cuts and tax hikes for the new year but also said that the public deficit for 2011 would come in above target.

"The euro got a little bit of a boost from the Spain news, but I don't think that's going to offer much meaningful support to the single currency heading into the new year," said Joe Manimbo, market analyst at Travelex Global Payments in Washington.

The euro reversed an early loss against the U.S. dollar to add 0.19% to $1.2986.

The same baggage that dragged on the euro this year - worries about sovereign debt levels and a lack of policy solutions - will weigh on the euro in 2012, he added, as the currency could slide to $1.25 or even lower in the first quarter.

"Since the market is overly bearish against the single currency, that does leave it susceptible to short covering bounces," he said. "But overall I think these anti-euro bets are justified given the still-unresolved debt crisis and the poor growth prospects.

Helped by investors squaring positions before year-end, the euro recouped losses from Thursday, when it sank to a 15-month low of $1.2858 as high yields at an Italian bond auction prompted selling.

The euro also struggled to trade above a decade low against the yen. The single currency fell to 99.844 yen on the EBS trading platform, breaking below an options barrier at 100.00 yen. The euro last traded at 100.00 yen, according to Reuters data. The euro is down about 7.9% against the yen for the year.

Traders said falls in the euro versus the yen were partly driven by the dollar extending losses against the Japanese currency after triggering stop loss orders on the break below 77.50 yen. Thin trading exacerbated volatility.

But analysts said the euro was likely facing a bleak year as the euro zone sovereign debt crisis, which has roiled markets for two years, rages on.

"The currency markets are going to continue to take their cue from fixed income and sovereign credit markets" in 2012, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

2010 EURO LOWS EYED

This year the euro has lost more than 2.9 percent versus the dollar, adding to a 6.6% decline in 2010.

But the relatively modest drop belies the currency's volatility this year, as the 17-nation monetary union lurched from problem to problem as policymakers failed to staunch the sovereign debt crisis.

Some analysts said the currency could drop as low as $1.20 by the end of 2012 in the absence of a comprehensive policy response to the crisis, potentially moving toward its 2010 low of $1.1876.

Italy, the euro zone's third-largest economy, remains at the center of the debt crisis that began in Greece two years ago, and its borrowing needs could overwhelm the bloc's financial defenses if it were forced to seek an international bailout.

Ten-year Italian yields are above the 7% level seen as unsustainable, with the country needing to raise 450 billion euros in debt markets in 2012. Government issuance of new euro zone debt will be scrutinized for any sign investors are shunning the currency bloc.

Analysts expect euro zone funding pressures to intensify in early 2012, with 230 billion euros of bank bonds, up to 300 billion euros in government bonds, and more than 200 billion euros in collateralized debt maturing in the first quarter.

Last week the ECB provided banks with almost half a trillion euros in three-year loans at low rates to encourage lending. Some policymakers have urged banks to use the funds to buy Italian and Spanish sovereign debt.

But the latest ECB data on Friday suggested banks were hoarding the cash, with 445 billion euros being deposited in the central bank's overnight facility, up from 436 billion euros the previous day.