December 23, 2011 / 8:20 AM / 6 years ago

FOREX-Euro edges higher, but plagued by debt worry

* Euro edges higher versus softer U.S. dollar in thin trade

* Better U.S. date underpins risk appetite into year-end

* But euro rallies unlikely to last while plagued by debt concerns

By Neal Armstrong

LONDON, Dec 23 (Reuters) - The euro edged up versus the dollar on Friday with risk appetite underpinned by better U.S. data, but investors were likely to sell the currency again in 2012 while the euro zone remained plagued by uncertainty surrounding its debt crisis.

A drop in U.S. weekly claims for jobless benefits to a 3-1/2-year low as well as an improvement in U.S. consumer sentiment in December boosted U.S. stocks and kept the euro afloat, though traders said flows were light as year-end holidays approached.

The single currency was up around 0.3 percent for the day at $1.3085, holding above a recent 11-month low of $1.2945. It is however down around 2.1 percent on the year.

“The dollar is still seen as a funding currency when risk appetite improves and people will sell dollars on the back of that,” said Chris Walker, currency strategist at UBS.

“But we still see uncertainties in the euro zone outweighing and look for a move towards $1.25 in the next few months,” he added.

Traders highlighted some stop-loss orders in the $1.3120 region, which if hit could push the euro higher in thin markets.

“Despite the fact the U.S. economy is strengthening, there are still expectations in the marketplace that the Fed has shown it’s very keen to print at the best of times, and that’s helping the likes of the euro.” said David Scutt, a trader at Arab Bank Australia in Sydney.

The Wall Street Journal carried a story late Thursday that the Federal Reserve could commit to keeping rates near zero right out to 2014. The report claimed the Fed could announce the decision at its next policy meeting on Jan 24-25.

But with the threat of sovereign downgrades throughout the euro zone hanging over the euro, sentiment towards the currency remains bearish heading into the new year.

Doubts over whether this week’s European Central Bank tender of cheap loans will be effective in easing the strain for troubled euro zone economies are likely to keep peripheral bonds under pressure. Italian paper in particular is expected to come under pressure heading into next week’s debt auctions .

Many market participants say largescale buying of Italian and Spanish debt by the European Central Bank is required to ease concerns over the precarious finances of the two countries.

Departing ECB Executive Board member Lorenzo Bini Smaghi said on Thursday the ECB was able to scale up its actions if needed and said quantitative easing could be an option.

RECORD LOWS

A break below $1.2945 in the euro would open up a test of the 2011 trough at $1.2860, traders said. The euro was hovering near all-time lows against the Australian dollar on diverging economic fundamentals between Europe and Australia.

The single currency slipped to an all-time low around A$1.2841 , for a loss of 1.8 percent on the week. It was also near a 3-month low of NZ$1.6810 against the New Zealand dollar and was last at NZ$1.6841.

The New Zealand dollar dipped briefly on news of another earthquake near Christchurch but soon steadied at $0.7746 , up from $0.7724 late in New York on Thursday.

Against the safe-haven Swiss franc, the euro was steady at 1.2219 franc, not far from the cap of 1.20 franc introduced by the Swiss National Bank in September.

The dollar index was down 0.2 percent to 79.771, while it stayed supported at 78.01 against the yen.

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