The euro is expected to remain on the defensive during the
final week of 2011, but a light European calendar and sparse
holiday trading conditions should keep the common currency
hemmed in its recent ranges.
The euro is poised to finish the year much where it began:
whipsawed by Europe's debt tinderbox while holding to
potentially flimsy support. Selling pressure has abated on
Spanish and Italian government debt, at least briefly,
although thin market conditions are exaggerating moves in
both directions.
Both countries remain candidates for downgrades of their
sovereign-credit ratings, as do Germany and France -- the
17-nation currency bloc's economic behemoths -- a risk that
will continue to put pressure on the euro.
After the European Central Bank offered 489.19 billion euros
($638.2 billion) to 523 banks last week, analysts will watch
for signs that this fresh liquidity is being used to buy
sovereign debt in the region's turbulent bond markets. Also
on the week's radar screens: Spain's newly elected government
will introduce a package of economic changes designed to
alleviate fears about its solvency.
Both Spanish and Italian banks "tidied themselves over neatly"
with the ECB's cash infusion, said Andrew Wilkinson, chief
economic strategist at Miller Tabak & Co. "But the big
take-away is there's less concern over Spain than Italy."
Indeed, Italy's benchmark 10-year yield moved back to around
7% at the end of last week, from closer to 6% as the week
began. Spanish 10-year yields have risen as well, but far
more modestly, to around 5.30%.
He said the fates of Italy and Spain are intertwined, and
integral to the euro's near-term fortunes. The euro traded
at $1.3076 midday Monday in New York, up slightly from
$1.3046 late Friday but down from $1.3445 at the end of
November.
Investors are expected to closely parse the economic
changes expected from Spanish Prime Minister Mariano
Rajoy on Friday. Another barometer of market sentiment
will come Wednesday, when Italy will offer between 5
billion euros and 8.5 billion euros of three-year debt.
