Euro edges higher, but more losses still likely

By Wanfeng Zhou

NEW YORK (BestGrowthStock) – The euro rose against the dollar on Thursday, but remained vulnerable to selling after an agreement by European Union leaders to set up a permanent crisis management mechanism failed to calm fears about the region’s spreading debt crisis.

EU leaders agreed at a summit on Thursday to make minor changes to the group’s governing treaty to establish a permanent mechanism from mid-2013 to resolve sovereign debt problems, diplomats said.

A draft statement, to be issued at the end of the two-day summit, showed euro zone leaders will declare their readiness to ensure adequate funds are available for the euro zone rescue fund, the European Financial Stability Facility (EFSF).

But analysts expect the euro to remain under pressure as European policymakers still appear divided over more concrete measures, such as making more money available to the European Financial Stability Facility or issuing joint European sovereign bonds, or “E-bonds.”

“Market participants continue to reduce exposure to the euro,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.

“The ongoing policy discord about measures required more urgently to tackle contagion is spooking investors,” he said.

The euro rose 0.2 percent to $1.3236 after falling to a session trough of $1.3181 on trading platform EBS.

Sell-stops are reportedly building at $1.3160, traders said, with resistance seen at $1.3215 and $1.3265.

Government debt yields for Spain, Portugal and Italy edged higher on Thursday, even after Spain sold 2.4 billion euros in 10- and 15-year bonds in an auction that traders said went smoothly.

Shankar said BNY’s bond flow data showed investors continue to shun Spanish, Italian, Portuguese, Irish and Greek exposure. He said the data also showed fresh net outflows from German Bunds.

“Portfolio managers pare euro zone exposure mostly across the board for now — there is ongoing uncertainty about the extent to which Germany may agree to shoulder some of the burden of assisting the peripheral nations,” he said.

DOLLAR AND YIELDS

Against the yen, the euro was down slightly at 111.17, while the dollar fell 0.3 percent to 84.02.

U.S. Treasury debt prices ended higher on Thursday after fluctuating throughout the day as buyers tentatively stepped in to take exposure to government bonds at more attractive yields.

Earlier, the dollar had risen after bond yields advanced after data showed new U.S. claims for jobless aid fell last week and factory activity in the mid-Atlantic region grew at its quickest pace in more than 5-1/2 years this month.

“The data turned Treasuries around and as U.S. rates backed up, the dollar went with them,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

The dollar had gained earlier this week as benchmark 10-year Treasury yields hit seven-month highs, pushing the dollar to a three-month peak at 84.51 yen on Wednesday.

While a further rise in U.S. bond yields was seen helping the dollar for now, some market players noted a breakdown in the dollar/yen’s correlation with U.S. bond yields and with U.S.-Japan yield spreads.

“It’s too early to say with conviction, but it could be due to an emergence of bearish factors, such as the U.S. fiscal situation,” said Jane Foley, senior currency strategist at Rabobank.

Traders said liquidity was showing signs of drying up as the year end was approaching and this was likely to increase the potential for sharp moves.

Euro edges higher, but more losses still likely