European Union leaders are meeting today to try to agree the next steps in tackling a year-long debt crisis that has consumed Greece and Ireland and threatens to spread to Portugal and Spain.
The euro gained 0.2 per cent to $1.3227 this afternoon, and the dollar remained lower after US housing starts rose more than forecast and initial jobless claims declined for the latest week.
Trading conditions have become choppy as the year-end approaches, making it hard to take directional bets, although a surge in US yields has boosted the dollar across the board, and took it to a three-month high of 84.51 yen yesterday.
Treasury prices edged up today and the dollar paused, helping the euro hold just above the bottom of a range it has kept since the start of the month, ahead of an EU summit set to discuss the euro zone debt crisis.
After months of battling to put out fires, including a €110 billion bailout for Greece and an €85 billion aid package for Ireland, EU leaders will discuss changing the EU's treaty to create a permanent crisis-resolution mechanism from 2013, and may look at enlarging their existing crisis fund.
The euro's decline has been compounded by more upbeat US economic data, which helped drive benchmark 10-year Treasury yields to seven-month highs at 3.565 per cent and powered the dollar higher.
"We expect plenty of contradictory headlines. Hence, the euro is now vulnerable to a renewed move lower, with a break below initial support at $1.3170 likely to trigger a decline to recent lows in the $1.2970 area," BNP Paribas analysts wrote in a client note.
Spanish 10-year bonds declined, pushing yields close to their highest in two weeks, after Spain's borrowing costs rose at its last debt sale for this year amid mounting concern over the country's credit quality.
Spain sold €2.4 billion of 10-year and 15-year bonds at an auction today, below a maximum target of €3 billion, the Bank of Spain said. The 10-year bonds sold at an average yield of 5.446 per cent, up from 4.615 per cent last time the bond was sold on November 18th. It sold 15-year bonds at an average yield of 5.953 per cent, compared with 4.541 per cent at the October auction
German 10-year yields were within three basis points of the highest since May 3rd even after a report showed the euro-region's manufacturing and services industries slowed more than economists forecast in December.
Irish Government bonds decline, with the yield rising 0.018 per cent to 8.236 per cent at 1.46pm.
The euro was slightly firmer on the day at $1.3230. Other chartists put key support for the bottom of the range at $1.3160-65 and say with a drop through there, the next level to watch is $1.3050-75 and then the November low at $1.2969.
Dollar/yen was steady at 84.23 yen, after pushing up through resistance at 84.00 yen yesterday. There was some talk of Japanese corporate selling at the higher levels.
A convincing break of 84.50 could bring the dollar into sight post-intervention peaks near 86.00 yen set in September.
The two-day summit comes as market pressure on the sovereign debt of peripheral euro zone states has fallen marginally before year-end, but EU officials are conscious that any failure to take decisive action could be interpreted as weakness, with the threat of further bond market fallout early next year.
Ratings agency Moody's warned Spain yesterday that its debt could be downgraded, and Portugal took steps to revive its economy and bolster its finances, hoping to stave off renewed market pressure that could force it into an EU bailout.
Moody's said it was concerned about Spain's high debt funding needs, its heavily indebted banks and its regional finances, but it did not expect Madrid would have to follow Greece and Ireland in seeking EU assistance.
The Portuguese government announced moves to cut red tape and boost growth, and said it would soon adopt quarterly fiscal targets. Both Spain and Portugal have come under intense pressure and are facing funding crunches next year.
As well as approving a change to the EU's treaty demanded by Germany to create a permanent system for handling crises from mid-2013, EU leaders will discuss how they can improve the current temporary financial safety net -a €750 billion joint EU/IMF loan facility.
One possibility is to increase the size of the fund, while another would involve making it more flexible in terms of the loans it can make, including the possibility of credit lines.
Belgian finance minister Didier Reynders said the EU's portion, €440 billion, could potentially be doubled to fend off the threat of renewed market pressure on Portugal and Spain, and Spain's economy minister backed the idea of a larger fund.
The EU's leading powers, Germany and France, say less than 10 per cent of the rescue funds have been committed so far, so there is no urgent need to increase the money available.
German chancellor Angela Merkel said no country in Europe would be left on its own, and reiterated that the euro was a strong currency that would be defended to the hilt.
"We know that the euro is our collective destiny, and Europe is our collective future," she said yesterday. "Nobody in Europe will be abandoned. Europe will succeed together."
European Commission president Jose Manuel Barroso urged leaders to act fast to reach a consensus at the summit.
The European Central Bank holds the second day of a regular, non-rate setting meeting today, when it is expected to agree to ask euro zone member states for more capital, a move to lower its risk profile as it helps tackle the debt crisis.
Reuters/Bloomberg
