FX OUTLOOK-Euro to drop as EU leaders meet; Fed meeting looms

* EU leaders meet to discuss spreading debt crisis

* Euro could fall back to recent low beneath $1.30

* Fed meeting also in focus; US data could boost dollar
(Adds positioning data, updates prices)

By Wanfeng Zhou

NEW YORK, Dec 10 (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 ended the
week down 1.2 percent versus the dollar. Charts suggest the
euro could fall back to its December low of $1.2970, while
positioning data showed more bearishness as speculators more
than doubled bets against the currency in the latest week.

EU heads of state and government meet on Dec. 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. For details, see [ID:nLDE6B90K3]

“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
(EUR=EBS: ), after hitting a session low of $1.3178 on trading
platform EBS. Support is at $1.3150, followed by its 200-day
moving average around $1.3115, traders said.

Short positions on the euro jumped to 15,290 contracts from
7,248 contracts in the week ended Dec. 7, data from the
Commodity Futures Trading Commission showed on Friday. Currency
speculators trimmed bets against the dollar for a fifth
straight week. For details, see [ID:nN10113473]

Ireland’s government will seek parliamentary approval for
an 85-billion-euro IMF/EU rescue package next week, though
there were concerns as the opposition Labour Party pledged to
vote against it. [ID:nLDE6B81XS]

Against the yen, the dollar rose 0.3 percent to 83.94
(JPY=EBS: ) and was up 1.6 percent this week.

The sharp rise in U.S. Treasury yields over the past week
has boosted the dollar 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.

FOMC, U.S. DATA

In the United States, focus will be on the Federal
Reserve’s monetary policy meeting on Tuesday and investors
expect no change to the central bank’s $600 billion bond
purchase program.

The Fed will likely continue highlighting risks to the
labor market in its post-meeting statement after data earlier
this month showed employment barely grew in November. However,
analysts don’t expect a very downbeat Fed as other data such as
consumer sentiment and jobless claims have been more positive.

A wide range of data next week could shed more light on the
U.S. economy, with highlights 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 U.S.
yields rise 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.

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

“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)

FX OUTLOOK-Euro to drop as EU leaders meet; Fed meeting looms