FOREX-Euro nudges nearer 11-month low, dlr firm on N. Korea

Mon Dec 19, 2011 4:39am EST

Related Topics

* Euro hovers near 11-month lows versus dollar of $1.2945

* Ratings agencies pile pressure on common currency

* Further euro losses could be limited by short positions

* Death of North-Korean leader lends mild support to dollar

By Neal Armstrong

LONDON, Dec 19, (Reuters) - The euro inched down towards 11-month lows on Monday on concerns that the euro zone sovereign debt crisis would damage global growth, while the safe-haven dollar also got support on uncertainty after the death of North Korean leader Kim Jong-il.

The euro was under pressure after Fitch's warning late Friday that it could downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach".

In addition, Moody's cut Belgium by two notches to Aa3 from Aa1 on Friday, citing risks to economic growth and the costs of bailouts of banks such as Dexia.

The euro was down about 0.2 percent at $1.3020 versus the dollar after falling to an 11-month low last week of $1.2945 on trading platform EBS. The dollar index was flat for the day at 80.257, paring gains made in the Asian session.

"The main focus for markets remains the developments in Europe and the subsequent implications for global growth," said Lee Hardman, currency strategist at BTM-UFJ.

The dollar got knee-jerk support after North Korean state television reported the demise of Kim Jong-il, but Hardman played down the likely impact of the news.

"The negative implications for global growth following Kim Jong-il's death are limited," he added.

The euro remains highly vulnerable to more EU ratings downgrades as France faces up to a possible double-notch cut by Standard & Poor's, which put a raft of European nations on review earlier in December.

Traders said a break of last week's low would open up a possible test of the 2011 trough around $1.2860.

The common currency was also under pressure against the Swiss franc, probing support at the 200-day moving average around 1.2191 after the Swiss National Bank left its cap on the franc unchanged at 1.20 francs last week.

The dollar was flat against the franc but gained 0.1 percent against the yen to 77.86 yen, while the Australian dollar was down 0.2 percent at $0.9945.

SHORT-COVERING LIFT

Investors will focus on a euro zone finance ministers' teleconference call from 1430 GMT about the draft text of a new fiscal compact agreed earlier this month. The talks will also include the size of individual bilateral loans to the International Monetary Fund.

Short-covering could also provide a lifeline for the euro. IMM data released on Friday showed net short positions in the euro against the dollar rose sharply as of Dec. 13, following a disappointing EU summit.

"With such large short positions, it's very possible that the euro could get a brief lift on short-covering in thin conditions ahead of the end of the year, even though pressure remains from the downgrade concerns," said Koji Fukaya, chief currency analyst at Credit Suisse in Tokyo.

Dollar resistance lies at $1.3090, which would be a 50 percent retracement of its recent move from $1.3236 to $1.2945.

Any sign of improving credit conditions in the euro zone would also provide support for the single currency.

The European Central Bank is preparing this week to prop up euro zone lenders with three-year low-price loans to revive the struggling interbank lending and funding market.

Banks could take an estimated 250 billion euros ($326 billion) at the first auction of the three-year loans on Wednesday. Some hope the banks will use the funds to buy EU sovereign debt and pull yields down.

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