Euro Drops to 11-Month Low Against Dollar Ahead of Debt Sale

Reuters

The euro hit an 11-month low against the U.S. dollar on Wednesday as a slide on regional debt worries triggered stops, with thin trading exacerbating volatility ahead of a key Italian debt sale on Thursday.

The euro had advanced earlier in the session after an Italian debt auction at which short-term borrowing costs were halved, a potential good sign for a sale of longer-dated bonds on Thursday.

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But those gains were short-lived, as the euro slid to a session low of $1.2938, its lowest since January, before rising back to trade at $1.2949.

Analysts said a European Central Bank report showing regional banks were still taking on liquidity to build reserves instead of adding risk rattled markets.

There appeared to be reluctance among European banks to lend to each other or invest in euro zone sovereign debt, analysts said, despite a recent massive liquidity injection by the European Central Bank through a three-year long-term refinancing operation.

"If European banks are still this concerned, it's not a good sign," said Karl Schamotta, senior markets strategist with Western Union Business Solutions. That, in turn, "means we're looking at a potential impact on growth in the new year."

The slide accelerated after the euro hit stops, traders said.

"The euro is running some stops down through $1.30," said John Doyle, a currency strategist with Tempus Consulting in Washington, D.C. "It might pop up to $1.32 because of year-end squaring, but haven't really seen it. There's no reason to own the euro going into the new year."

Traders emphasized that year-end liquidity was thin, exaggerating moves.

Worries remain over Italy's sale on Thursday of debt with maturities as long as 10 years, with traders reluctant to take on risk, particularly at year-end.

Nor will any one auction solve the two-year-old euro zone sovereign debt crisis, analysts noted.

"You can't make your decision based on one auction," said Ihab Salib, senior portfolio manager and head of international fixed-income at Federated Investors in Pittsburgh. "It's going to be an evolution of more than one event."

Italy will need strong demand on Thursday from international investors to hold benchmark 10-year borrowing costs below the critical 7 percent level that is seen as unsustainable in the longer term.

While the euro is off about 3.2 percent against the U.S. dollar this year, the currency has seen wide swings as investors fret the 17-nation monetary union could see drastic changes because of the debt crisis.

That volatility could continue into next year, Salib cautioned.

"Unless you're really doing your homework and you're capable of being fairly active, you're better off just staying away," he said. "Moves that used to take weeks and months to develop can happen in a 2- or 3-day period."

STERLING DROPS

Sterling fell to its lowest in just over a week versus the dollar, with traders citing a large sell order that pushed the UK currency broadly lower in thin year-end trade.

The pound fell 1 percent on the day to $1.5492, its lowest since Dec. 19, with traders saying illiquid market conditions exaggerated moves. They also reported month-end dollar buying by U.S. corporates.

The dollar rose against a basket of major currencies, up 0.81 percent to a better than one-week high. (Editing by Chizu Nomiyama)

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