FOREX-Euro creeps higher but vulnerable into 2012

by lexie Fri Dec 23, 2011 9:07 am

Fri Dec 23, 2011 7:36am EST

* Euro edges higher versus dollar in thin trade
* Upbeat U.S. data underpins risk appetite into year-end
* Euro rally unlikely to last while debt concerns weigh

LONDON, Dec 23 (Reuters) - The euro edged up versus
the dollar on Friday with risk appetite underpinned by upbeat
U.S. data but with the euro zone crisis unresolved, investors
were likely to sell the single currency again in 2012.

A drop in U.S. weekly claims for jobless benefits to a
3-1/2-year low and improved U.S. consumer sentiment in December
boosted stocks and kept the euro afloat, though traders said
flows were light as year-end holidays approached.

The single currency was up around 0.2 percent for the day at
$1.3079, holding above a recent 11-month low of $1.2945.
It is however down around 2.1 percent on the year.

"The dollar is still seen as a funding currency when risk
appetite improves and people will sell dollars on the back of
that," said Chris Walker, currency strategist at UBS.

"But we still see uncertainties in the euro zone outweighing
and look for a move towards $1.25 in the next few months."

Traders highlighted some stop-loss orders in the $1.3120
region, which if hit could push the euro higher in thin markets.
The Wall Street Journal reported the Federal Reserve could
commit to keeping rates near zero right out to 2014, saying the
U.S. central bank could announce the decision at its next policy
meeting on Jan 24-25.

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 paper in particular is 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
programme 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. 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.

RECORD LOWS

A break below $1.2945 in the euro would open up a test of
the 2011 trough at $1.2860, traders said. The euro was hovering
near all-time lows against the Australian dollar on diverging
economic fundamentals between Europe and Australia.
The single currency slipped to an all-time low around
A$1.2841, for a loss of 1.8 percent on the week, and
as the euro's 25-day positive correlation with European stocks
has weakened of late, 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
1.2229 francs, not far from the cap of 1.20 introduced
by the Swiss National Bank in September.

The dollar index was down 0.2 percent at 79.779,
while the U.S. currency stayed supported at 78.00 against the
yen. The United States is due to release personal
spending, durable goods and new home sales data later in the
day.

http://www.reuters.com/article/2011/12/23/markets-forex-idUSL6E7NN17220111223