FOREX-Euro edges up v dollar but limps into 2012

NEW YORK (Dec 30): The euro pared losses from a 10-year low against the
yen and edged slightly higher against the U.S. dollar on Friday, nearing
the end of a year of stumbles that could presage more of the same in
2012.

The single currency fell to 99.963 yen on the EBS trading
platform, breaking below an options barrier at 100.00 yen. The euro last
traded at 100.15 yen, according to Reuters data. The euro is down about
7.8 percent against the yen for the year.

Thin trading exacerbated volatility, with many traders out for the end-of-year holidays.

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.

"Particularly we'll be looking at Italian and Spanish debt and those nations' ability to access reasonably priced capital."

In a move to cut back its budget deficit and reassure markets, Spain's
government said on Friday that the country would cut 8.9 billion euros
of spending next year across all ministries, as well as raising some
taxes.

But the government also said that the 2011 deficit would be higher than expected.

The single currency reversed an early dip against the U.S. dollar to advance 0.08 percent to $1.2972.

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

"The
euro has held up relatively well given the crisis we've seen, but that
view is likely to come under pressure in the new year," said Simon
Smith, economist at FXPro.

"There is huge focus on what's going
on in Europe. Next year is likely to be the year when either euro zone
leaders send the region on a path towards greater fiscal integration or
we see some of the more vulnerable countries having to leave."


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.

The dollar index was at 80.159, off a near one-year peak of 80.854 hit on Thursday.

2010 EURO LOWS EYED

This year the euro has lost more than 3 percent versus the dollar, adding to a 6.6 percent 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 towards its 2010 low of $1.1876.

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

Ten-year Italian yields are above the 7
percent 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 scrutinised 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 collateralised 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.


"If the euro is going to be salvaged the market needs an injection of
faith over the next few weeks. The Italian and Spanish auctions are
key," said Neil Mellor, currency strategist at Bank of New York Mellon. -
Reuters