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 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. 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 December 7, data from the Commodity Futures Trading Commission showed on Friday. Currency speculators trimmed bets against the dollar for a fifth straight week. 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.
Against the yen, the dollar rose 0.3 percent to 83.94 and was up 1.6 percent this week. The sharp rise in US 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 US yields will remain the key driver of the US currency's path in the near-term," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. 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 labour 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 US economy, with highlights including retail sales, consumer and producer prices, and housing starts.
"We expect US data to continue to remain firm," said Barclays' Chatterjee. "US 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 US 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.
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