December 13, 2011 / 12:05 AM / 8 years ago

Euro vulnerable to more downside; Italian debt sale eyed

SYDNEY (Reuters) - The euro wallowed at 11-month lows against the dollar in Asia on Wednesday, with bearish positioning dominating overnight moves after the U.S. Federal Reserve policy meeting ended with no surprises.

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

With the Fed out of the way and no mention of QE3, euro bears stepped up their selling and ended weeks of deadlock, sending the common currency to as low as $1.30090, a level not seen since mid-January.

The euro last stood at $1.3034, with talk of bids near $1.3000 to protect options barrier likely to limit its downside for now. But the break of stalwart support around $1.3200 has raised the risk of a move to the January 10 trough around $1.2870, trader said.

“The credibility of the European response is very much in doubt, driving EUR/USD lower,” said Kit Juckes, head of foreign exchange research at Societe Generale.

“European institutions continue to hammer the point of what they are not willing to do. The market is driving down the point of how little they are willing to risk in a deleveraged financial system, and this ahead of the holidays.”

Markets were braced for a possible mass downgrade of euro zone countries, which would deepen the region’s debt crisis, after last week’s key summit offered no hopes for an immediate resolution. A downgrade for France could come any day.

The Fed also highlighted the turmoil in Europe as a big risk to the U.S. economy, keeping intact an easing bias. It left monetary policy on hold as expected.

The euro’s woes saw the dollar index .DXY power to an 11-month high of 80.395. The greenback also rose against the yen, popping above 78.00 for the first time since December 5.

Commodity currencies sagged as a result, and the Australian dollar dipped below parity against the greenback at one stage. It last stood at $1.0008, with support seen at $0.9938, the 61.8 percent retracement of the November 23 to December 8 rally.

The market’s focus now turns to an Italian bond sale later on Wednesday, and another by Spain on Thursday. The danger of a credit ratings downgrade may keep borrowing costs punishingly high for the two sovereigns, traders said.

“The euro traded with scant reference to euro zone bond developments on Tuesday, but that does not mean that a good, bad or ugly auction today will not be a source of significant FX volatility on Wednesday,” BNP Paribas analysts said.

Additional reporting by Reuters FX analyst Krishna Kumar; Editing by Wayne Cole

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