FOREX-Dollar firm but lacks punch, euro drifts at lows

* Dollar above 84 yen but lacks pep for move higher

* Euro eyes bottom of range at $1.3164 after support breaks

* EU summit not seen offering solution to debt crisis

By Charlotte Cooper

TOKYO, Dec 16 (BestGrowthStock) – The euro steadied on Thursday ahead
of an EU summit but looked vulnerable to further falls, while the
dollar held near the top of recent ranges against several major
currencies but lacked energy to vault them.

Trading conditions have become choppy as the year-end
approaches, making it hard to take directional bets, although a
surge in U.S. yields has boosted the dollar across the board, and
took it to a three-month high of 84.51 yen (JPY=: ) on Wednesday.

Treasury prices edged up on Thursday and the dollar paused,
helping the euro hold just above the bottom of a range it has
kept since the start of the month, ahead of an EU summit set to
discuss the euro zone debt crisis.

“The move above 84.41 yen should be a bullish sign for the
dollar/yen but it does depend on U.S. yields,” said Masafumi
Yamamoto, chief FX strategist at Barclays in Tokyo.

“The euro area still faces peripheral problems … If
contagion spreads to Portugal, then who’s next?”

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Euro zone graphic package: http://r.reuters.com/hyb65p

More on euro zone debt: [ID:nLDE6T0MG]

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The euro’s decline has been compounded by more upbeat U.S.
economic data, which helped drive benchmark 10-year Treasury
yields to seven-month highs at 3.565 percent and powered the
dollar higher.

EU leaders meet in Brussels on Thursday and Friday for their
end-of-year summit, with efforts to overcome the region’s
year-long debt crisis at the heart of their agenda.

Leaders will try to agree the next step in dealing with the
debt crisis and how to stop it spreading. They will discuss
changing the EU’s treaty to create a permanent crisis-resolution
mechanism from 2013 and might look at enlarging the existing
crisis fund. For preview see [ID:nLDE6BE29I].

“We expect plenty of contradictory headlines. Hence, the euro
is now vulnerable to a renewed move lower, with a break below
initial support at $1.3170 likely to trigger a decline to recent
lows in the $1.2970 area,” BNP Paribas analysts wrote in a client
note.

“With continued pressure on peripheral spreads, today’s
Spanish bond auction will be important for sentiment.”

Spain, which rating agency Moody’s warned on Wednesday could
be downgraded, is scheduled to sell up to 3 billion euros of 2020
and 2025 bonds on Thursday.

RBC analyst Sue Trinh said those maturities were typically
well subscribed, but at a price.

“At the margin, it may be euro-positive,” she said.

EURO FLAT

The euro was slightly firmer on the day at $1.3230 (EUR=: ).
Other chartists put key support for the bottom of the range at
$1.3160-65 and say with a drop through there, the next level to
watch is $1.3050-75 and then the November low at $1.2969.

Dollar/yen was steady at 84.23 yen (JPY=: ), after pushing up
through resistance at 84.00 yen on Wednesday. There was some talk
of Japanese corporate selling at the higher levels.

A convincing break of 84.50 could bring the dollar into sight
post-intervention peaks near 86.00 yen set in September.

The dollar index (Read more about the global trade. ) rose more than 1 percent overnight to above
80.00, but was flat at 80.23 on Thursday (.DXY: )(=USD: ).

Yet the sharp rise overnight has only brought the dollar
index towards the top-end of a wide range around 78.80-80.50 seen
in the past few weeks as thin conditions made for choppy moves.

“If we see a strong reading on U.S. initial jobless claims
today, we could see a fresh rally in the dollar,” said a trader
at a U.S. bank.

Data last week showed the four-week average of jobless claims
fell to a four-year low of 427,500, raising hopes that a stagnant
U.S. job market may finally be starting to gain strength.

While a further rise in U.S. bond yields is seen helping the
dollar, some market players took note of a breakdown in the
dollar/yen’s correlation with U.S. bond yields and with
U.S.-Japan yield spreads.

Its three-month correlation with five-year yield spreads fell
to just 0.65 from 0.96 in August/September.

Some market players think a further fall in correlation could
be a sign of a fundamental change in markets, as it could
indicate that some market players regard higher U.S. yields as
negative for the U.S. economy, whether that comes from worries
over future inflation or a widening deficit.

Commodity currencies such as the Australian dollar faded
against the stronger dollar. The Aussie was last at $0.9875
(AUD=D4: ), well off a one-month high of $1.0030 set earlier in the
week.
(Additional reporting by Ian Chua in Sydney and Hideyuki Sano in
Tokyo, contributions by Reuters FX analysts Krishna Kumar and
Rick Lloyd; Editing by Joseph Radford)

FOREX-Dollar firm but lacks punch, euro drifts at lows