The dollar on Friday closed the week lower against a currency basket, and more losses were likely next week as portfolio managers rebalance their portfolios for the year-end after gains in US assets. Because of a rise in US stocks and Treasuries this year, asset managers hold more dollars relative to their benchmarks. As a result, they would have to sell dollars to balance their portfolios for the end of the year, analysts said.
---- Euro fundamentals have not changed, downturn intact
---- US recovery gains ground with raft of positive data
---- Euro pressured while euro zone debt concerns weigh
Although the S&P 500 is up only 0.4 percent for the year, it surged 11.6 percent in the fourth quarter. Yields on benchmark US Treasuries were at 2.0209 percent on Friday, compared with 3.3343 percent at the beginning of the year. Fundamentally, though, nothing has changed. The euro zone is still in the throes of a festering financial crisis, and European leaders are nowhere near a solution to the region's debt problems. And as soon as the rebalancing of portfolios is out of the way, the euro should resume its downturn and the dollar its uptrend, analysts said.
"Next week, we have quarter-end, month-end and year-end. We would have a fair amount of dollar selling overall as portfolio managers re-adjust their hedges," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "But ultimately I'm not looking for a risk-positive first quarter. The growth picture is too troubling," he said.
Dolan, who sees growth in the United States as still fragile, added, "We could likely see a backsliding in the pick-up of US data in the fourth quarter." The dollar index was flat in late afternoon trading at 80.010 and down 0.2 percent this week. Currency speculators, meanwhile, increased their bets in favour of the US dollar to $17.63 billion in the latest week, while slightly trimming short euro positions to 113,697 contracts.
The euro was little changed against the dollar on Friday and for the week after two weeks of declines. The single currency was last at $1.30480, holding above a recent 11-month low. It is down around 2.5 percent on the year, 2.6 percent weaker for the quarter and down nearly 3.0 percent so far for the month of December.
Traders highlighted some stop-loss orders in the $1.3120 region, which if hit could push the euro higher in thin markets. The session peak posted at $1.30958 on trading platform EBS. A break below $1.2945 in the euro would open up a test of the 2011 trough, traders said.
The euro did slip against the dollar after US data on Friday showed sales of new single-family homes hit a seven-month high in November. That came on the heels of other signs of improvement in the US economy and added to the dollar's allure at the euro's expense.
The data on home sales came a day after another promising report on initial jobless claims. Jobs and housing growth have been the two missing ingredients of the US economic recovery. Optimism on the US economic recovery stands in sharp contrast to the doom felt in Europe as monetary and political authorities struggle to resolve the sovereign debt crisis and hold the euro zone together.
"Three back-to-back weekly jobless claims reports showing improvements in the US; but in Europe, unfortunately, we are not quite seeing that," said Greg Salvaggio, vice president of currency trading at Tempus Consulting in Washington. "The theme next year is euro down, euro down, euro down." The threat of sovereign downgrades still hangs over the bulk of the euro zone as sentiment toward the single currency remained bearish heading into the new year.
Two independent European government sources told Reuters on Friday that Standard & Poor's is not expected to release its much-awaited verdict on debt ratings for 15 euro zone countries until January. S&P early this month warned that it might issue a mass downgrade on ratings of the 15 countries.
Doubts over the effectiveness of this week's huge European Central Bank tender of cheap loans in easing the strain for troubled euro zone economies are likely to keep peripheral sovereign bonds under pressure. Italian bonds in particular are expected to come under renewed strain as the country faces a major refinancing hurdle early in the new year.
Morgan Stanley analysts expect the euro to be among the worst-performing G10 currencies next year due to the deteriorating economic outlook in Europe, continued ECB easing and liquidity measures, along with portfolio outflows.
The euro hovered near all-time lows against the Australian dollar on diverging economic fundamentals between Europe and Australia. Analysts expected the euro to continue to lag the risk-sensitive Aussie should asset markets rally in 2012. Against the safe-haven Swiss franc, the euro was flat at 1.2220 francs, not far from the cap of 1.20 introduced by the Swiss National Bank in September.
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