Euro up against dollar

The euro climbed on Wednesday as tumbling US yields dogged the dollar, but the single currency was set to post its first full-year drop in three years after the financial crisis sparked a rush into the safety of the greenback. The dollar has slid into year-end as markets have settled down from a historic bout of volatility, leaving it on shaky footing heading into 2009 as investors eye big US deficit-spending and the Fed printing money to revive the economy.
The euro was proving the best of a bad bunch as the relatively staid pace of monetary easing by the European Central Bank contrasted with a more dramatic pace of rate cutting by the Federal Reserve and the Bank of England (BoE). Among the milestones, the pound and Australian dollar were set to post record yearly drops against the dollar. Sterling's 27 percent slide would be the biggest since the gold standard was abandoned in 1971.
Analysts said the pound's battering may have put it in a position to recover next year, even as investors fret that the dollar could be driven back towards record lows hit earlier in the year due to aggressive US action to help the economy. The Fed has cut rates to virtually zero and has launched an array of asset-purchase programmes to help markets recover. As a result, 10-year US Treasury yields have tumbled to near 2.0 percent - their lowest since 1950 and below euro zone yields.
A drop in volatility in financial markets would likely mean the dollar comes under more pressure in 2009 as safe-haven holdings are trimmed back, traders and analysts said. The euro edged up 0.1 percent from US trade to $1.4084, but was down 3.6 percent since the start of the year having fought back from a 2-1/2-year low near $1.2330 hit in October.
Trading was very thin with Tokyo on holiday and many investors away for the New Year break. The pound hovered near an all-time low against the euro at 97.53 pence on the Reuters dealing system. The euro is up 33 percent on the year and seemed set on reaching parity for the first time since its launch in 1999.
Against the dollar, the pound was hovering just above a 6-1/2-year low at $1.4445. Sterling has taken a beating at year-end because the BoE is seen likely to cut rates further from 2 percent and possibly adopt more aggressive monetary easing measures like the Fed. By contrast, the ECB has eased by a relatively tame 150 basis points to 2.5 percent.