Euro to fall back toward $1.30 as EU leaders meet

By Wanfeng Zhou

NEW YORK (BestGrowthStock) – The euro should extend losses against the dollar next week as a meeting of European Union leaders will likely heighten concerns about deepening divisions within the bloc over how to solve its debt crisis.

The euro slipped toward $1.3150 on Friday and was on track to post a decline of 1.2 percent versus the dollar this week. Technical charts point to more downside, suggesting the euro could fall back toward its December low of $1.2970 in the coming weeks.

EU heads of state and government meet on December 16-17 to discuss the region’s spreading debt crisis. Expectations of meaningful progress are low after Germany and France on Friday rejected calls for an increase in the bloc’s rescue fund and joint sovereign bonds.

“Clearly, there’s been much less consensus on the long term stability mechanism such as the euro bond proposal,” said Aroop Chatterjee, currency strategist at Barclays Capital in New York. “We expect the euro/dollar to continue to be pressured lower until some solutions are put in place.

“Our view is that the euro will make it out of this sovereign debt issue, but it’s going to obviously require political will,” he said.

The euro last traded 0.1 percent lower at $1.3227, after hitting a session low of $1.3178 on trading platform EBS. The next key target is $1.3150, followed by its 200-day moving average around $1.3115, traders said.

Ireland’s government will seek parliamentary approval for an 85-billion-euro IMF/EU rescue package next week, though there were concerns about political infighting as the opposition Labour Party pledged to vote against it.

Against the yen, the dollar rose 0.2 percent to 83.86 and was up 1.5 percent this week.

The sharp rise in U.S. Treasury yields over the past week has boosted the dollar especially versus the yen on the view that the Obama administration’s proposed tax cut extension would spur economic growth.

Higher bond yields tend to boost the greenback as they increase the return on dollar-denominated assets.

“We suspect the path of U.S. yields will remain the key driver of the U.S. currency’s path in the near-term,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

The U.S. dollar (.DXY: ) index, which tracks the greenback’s performance against a basket of major currencies, was flat at 80.043, struggling to break through the 80.00-81.50 barrier that capped its November rally.

FOMC, US DATA

In the United States, focus will be on the Federal Reserve’s December monetary policy meeting on Tuesday, though investors expect few surprises from the post-meeting statement.

The Fed committed to buy $600 billion in government bonds at its November meeting in an effort to support a struggling economy.

A wide range of economic data will also be released next week, including retail sales, consumer and producer prices, and housing starts.

“We expect U.S. data to continue to remain firm,” said Barclays’ Chatterjee. “U.S. yields will likely go higher and risky assets will likely remain firm, so you probably would expect the dollar to do better against the lower yielding currencies such as the yen and euro.”

Some analysts say dollar/yen could play catch up as yield increases further. Given current rate spreads at the 10-year sector of the curve, there is a growing consensus that dollar/yen spot should perhaps be trading closer to the 87-88 range, they said.

Dollar/yen is also the standout performer in the options market with apparently high demand for bullish structures.

“From a valuation perspective, the yen is simply overvalued,” said Vasileios Gkionakis, macro strategist at Fulcrum Asset Management LLP in London. Fulcrum oversees about $900 million in assets.

Gkionakis expects the dollar/yen to trade around 85 in the short term and said the fair value for dollar/yen is probably around 100-104.

(Additional reporting by Gertrude Chavez-Dreyfuss and Julie Haviv; Editing by Chizu Nomiyama)

Euro to fall back toward $1.30 as EU leaders meet