December 16, 2011 / 4:21 AM / in 6 years

Euro posts largest weekly loss vs dollar in three months

One hundred Euro banknotes lay on top of various Swiss Franc notes in this picture illustration at a bank in Warsaw, July 18, 2011. REUTERS/Kacper Pempel

NEW YORK (Reuters) - The euro edged higher against the U.S. dollar on Friday but posted its worst weekly performance in three months versus the greenback, with the threat of euro zone sovereign downgrades keeping the common currency vulnerable to sell-offs next week.

Fitch Ratings on Friday warned it may downgrade France and six euro zone countries, led by Italy, Spain, and Belgium, due to lack of a comprehensive solution to the two-year old sovereign debt crisis. The ratings firm did affirm France’s triple-A rating, with the country supported by a wealthy and diversified economy.

The Fitch news spurred selling in the euro that pushed it to a global session low below $1.30.

“I don’t have much confidence that the euro will go higher from here,” said Raymond Attrill, head of FX strategy for North America at BNP Paribas in New York. “We could have some headline risks out of Europe, get some news out of ratings agencies that sort of confirms the fears about downgrades and we could easily be two to three big figures below $1.30.”

In late afternoon trading, the euro was up slightly at $1.30350. It was down 2.6 percent on the week, its largest weekly loss since the week of September 11. It hit a global session high of $1.30846 earlier, boosted by some short-covering, with traders reporting thin end-of-year liquidity.

In the near term, a euro bounce, if it happens, might extend to $1.31, although gains could be limited from there. Thin and illiquid trading conditions through the upcoming holiday period could mean constrained movement, with short-term support in the $1.3010/15 area.

“Overnight, we saw a little bit of a rebound in the euro, basically some profit-taking and positioning ahead of the weekend,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

“But ultimately I think the story is a negative one for the euro and that will continue to play itself out over the week ahead.”

Analysts said a threat of downgrades from rating agency Standard & Poor‘s, which put a raft of euro zone countries on review ahead of the summit, continued to hang over governments, including Germany and France.

Despite downgrade rumors circulating since last week, Italian and Spanish bond spreads over Bunds tightened on Friday.

“There remains a great deal of concern about the direction of the euro zone,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. “We’re still not trading on fundamentals and haven’t been for some time.”

Earlier this week, the euro dropped to an 11-month low around $1.2945 and a break below that level would open the door to a test of the January low around $1.2871.

Analysts said investors were concerned some European Union states may back off from proposals on a tighter fiscal regime that were the centerpiece of the summit.

Uncertainty over the outcome of Greek debt swap negotiations and signs some national central banks, including Germany‘s, were reluctant to boost lending to the International Monetary Fund added to the view the crisis may intensify in the new year.

About 600 billion euros are available to fight the debt crisis and more will be provided in March if needed, more than Italy and Spain’s combined funding needs for 2012, European Financial Stability Facility chief Klaus Regling said on Friday.

In the options market, one-month euro/dollar implied volatilities hit a 3-1/2-month low around 12.1 percent, coming further off levels that prevailed in recent months. Options traders attributed the decline to many institutions closing their books ahead of the Christmas holidays rather than to reduced anxiety about the euro zone debt crisis.

The euro added to recent losses against the Swiss franc, falling 0.3 percent to 1.22070 francs. The Swiss National Bank has held its cap on the franc at 1.20 per euro, dampening talk that they may raise the peg.

Commodity currencies were higher, with the Australian dollar up 0.6 percent at US$0.9968. The New Zealand dollar was also well bid, rising 1.0 percent to US$$0.7600.

Next week’s U.S. economic data, which includes housing starts, personal income and spending, as well as durable goods orders, could add more optimism about the improving U.S. economy in the year’s waning days, analysts said. That would spur a rally in risky trades and a sell-off in the safe-haven dollar.

Also on Friday, data from the Commodity Futures Trading Commission showed that currency speculators raised their bets in favor of the U.S. dollar in the latest week to $16.32 billion from $14.59 billion the previous week. Speculators also raised their bets against the euro to 116, 457 contracts.

Additional reporting by Nick Olivari; Editing by Dan Grebler

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