Euro creeps higher but vulnerable into 2012

From 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.
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.