FOREX-Euro hits decade low vs yen, more falls likely

Mon Jan 2, 2012 8:18am EST

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* Euro hits decade low vs yen, then recovers in thin trade
    * Euro stays under $1.30 vs USD, more falls expected
    * But substantial short euro positions could limit losses

    By Jessica Mortimer and Neal Armstrong	
    LONDON, Jan 2 (Reuters) - The euro fell to a decade
low versus the Japanese yen on Monday with more falls expected
as concerns about the financing needs of highly indebted euro
zone countries plagued the shared currency into the new calendar
year.	
    The euro fell as low as 98.71 yen on the EBS
trading platform in early Asian trade, its lowest since late
2000, extending falls on Friday when it broke below 100 yen to
finish the year down around 8 percent. 	
    It recovered to trade flat for the day at 99.60 yen in
Europe, with liquidity thin because most Asian markets as well
as the UK and U.S. were closed for New Year holidays. Versus the
dollar, the euro was steady at $1.2947, less than
a cent above its 2011 low of $1.2858 hit last week.	
    Worries about high sovereign debt levels and a lack of
policy solutions to the region's 2-year-old debt crisis were
expected to push the euro lower in the coming weeks and months.	
    However, the slide may be limited by periodic short-covering
rallies as investors trim hefty bets against the currency, with
Commodity Futures Trading Commission data on Friday showing
short euro positions swelled to a record high in the latest
week. 	
    "There's still a lot of pressure on the euro due to concerns
about the refinancing needs of some euro zone countries in the
first quarter," said Arne Lohmann Rasmussen, head of currency
research at Danske Bank in Copenhagen.	
    "This is driving many to safer assets and currencies, like
the Japanese yen."	
    However, he said the substantial number of short euro
positions could limit the euro's falls, potentially enabling it
to rebound back above $1.30 versus the dollar, especially if
U.S. ISM and jobs data this week point to an improving U.S.
economy. 	
    Nevertheless, in the absence of a comprehensive European
policy response to the debt crisis, the euro could test its 2010
low of $1.1876 this year, some traders said, while support was
highlighted around $1.2600, the 76.4 percent retracement of the
euro's 2010-2011 rally.	
    Policymakers marked the 10th anniversary on Sunday of the
introduction of euro notes and coins by urging governments to
save and consolidate to overcome their debt crises, while
warning 2012 would be harder than 2011. 	
    Concerns about the massive task facing European leaders as
they struggle to contain the region's debt crisis were
highlighted as Spain's new government warned last week its 2011
budget deficit would be larger than expected. 	
    A deteriorating euro zone economy will also worry investors,
with many anticipating a recession in the region. A survey on
Monday showed euro zone manufacturing activity declined for a
fifth consecutive month in December. 	
    "We believe that the generally dire euro zone purchasing
manufacturers surveys provide significant support to the case
for the ECB to cut interest rates again in the early months of
2012, especially as they show essentially muted inflationary
pressures," said Howard Archer, chief UK and Europe economist at
IHS Global Insight. 	
    	
    DEBT AUCTIONS EYED	
    Italy, the euro zone's third-largest economy, remains at the
centre of the debt crisis, and its borrowing needs could
overwhelm the bloc's financial defences if it were forced to
seek an international bailout.	
    In the coming months, nervous investors will focus intently
on demand at auctions of euro zone bonds.   	
    	
    "We remain a sell on rallies (with the euro) as we tend to
think the euro zone crisis will actually get worse before it
gets better," Kathleen Brooks, research director at FOREX.com in
a note to clients. 	
    The euro's troubles have benefited the dollar and yen, both
of which tend to attract safe-haven flows in times of trouble. 	
    Against a basket of major currencies, the dollar was
up 0.1 percent at 80.260, having hit a near one-year high of
80.854 last week. The dollar fell to a one-month low against the
yen of around 76.30 yen before steadying at 76.90.
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