Investors will remain wary of placing bets in favour of the euro, with issues on both sides of the Atlantic likely to contain risk appetite. While the euro rose against the dollar on Friday on the possibility the European Central Bank and the International Monetary Fund will bail out bigger eurozone economies and borrowing costs for Italy and Spain eased, sentiment remained bearish.
----- Debt crisis still points to weaker single currency
----- Euro short bets rise in latest week
The common currency fell for three straight weeks as fears persisted that the debt crisis could engulf major eurozone states such as France and trigger a break-up of the 17-nation bloc. "While we had some consolidation today, the overall dynamics for the euro remain weak and we expect it to end the year at around $1.29," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
"There is not much clarity on what is needed to support the eurozone as a whole," he said. "The ECB remains reluctant to increase purchases of periphery bonds and the EFSF (European Financial Stability Facility) has not yet been fully implemented." Yields on Italian and Spanish bonds eased after the ECB stepped in to stabilise the market, but fears remain that both countries' borrowing costs are at unsustainable levels. Euro zone officials said there have been discussions that the ECB could lend to the IMF to provide the fund with enough money to bail out even the biggest eurozone countries.Pressure has also mounted on the ECB to step up its bond purchases.
Economists say only the ECB would have enough fire power to quell a confidence crisis spreading throughout the eurozone. But EU law forbids the bank to finance government borrowing directly, thus the possible arrangement with the IMF. "Right now there is no buyer of last resort for the bonds and while austerity measures can boost short-term confidence, they are not a panacea," McCormick said. "The headwinds in Europe are potent and acute."
Many analysts believe the only way to stem the contagion in Europe is for the ECB to buy up large quantities of bonds, effectively the sort of "quantitative easing" undertaken by the US and British central banks. Bond market participants polled by Reuters saw a 50/50 chance that the ECB will expand bond purchases to engage in outright quantitative easing.
Many economists say the eurozone is on the brink of another recession. This could prompt the ECB to cut interest rates again, a negative for the euro, as it would make higher-yielding currencies more appealing. The euro last traded up 0.4 percent at $1.3514 on Reuters data, pulling away from a five-week low of $1.3420 struck on Thursday. On the week, the euro was down about 2 percent versus the dollar.
The dollar could gain on risk aversion next week given that a high-profile effort to trim stubborn US budget deficits appeared near collapse on Friday as Democrats and Republicans were unable to agree on tax increases and benefit cuts. The 12-member "Super Committee" in Congress has until midnight on Wednesday to strike a deal that would save at least $1.2 trillion over 10 years. Spanish elections set for Sunday could help support a rise in the euro against the dollar in the very near-term, because the opposition party, which is seen as favouring austerity measures, is expected to win. But most see a downward trend in the euro.
Currency speculators raised their bets in favour of the US dollar in the latest week to their largest in a month, according to data from the Commodity Futures Trading Commission released on Friday. "What is surprising is how little the USD has gained over the last few months, not how much it has gained," said Steven Englander, global head of currency research at CitiFX, a division of Citigroup, in New York. Against the yen, the dollar slid as low as 76.575 on trading platform EBS, the weakest level since Japan's massive intervention on October 31. It was last down 0.1 percent at 76.86.
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