The euro hit 16-month lows against the dollar and sterling today and hovered near an 11-year low versus the yen, with further declines seen in store for the embattled single currency.

Market players said little relief was in sight for the euro, with next week's Italian and Spanish government bond sales likely to keep the market on edge and the euro under pressure.

The euro dipped to as low as $1.2763 on trading platform EBS today, its lowest level since September 2010. After trimming some losses the euro stood at $1.2777, down 0.1 per cent from late US trade yesterday.

Against sterling, the single currency touched a 16-month low of 82.445 pence.

The euro's drop helped buoy the dollar to as high as 81.062 against a basket of currencies at one point, the highest level for the dollar index in about a year.

Even a meeting between France's Nicolas Sarkozy and German Chancellor Angela Merkel on Monday may not produce much euro positive news, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

"Media reports have said that discussions at the Sarkozy-Merkel meeting will focus on the issue of enforcing budget discipline. But I don't think that's what the market is looking for," he said.
"I hope we see the type of discussions that provide assurances on the effectiveness of the ESM."

The euro could rise sharply on short-covering if a decision is reached at some point to increase the firepower of the ESM, but the single currency is likely to remain under pressure until then, Mr Karakama said.

It may take a few months to reach such a decision, with French prime minister Francois Fillon having said yesterday that a March summit of European Union leaders will discuss increasing the clout of the ESM.

Ahead of his meeting with Dr Merkel next week, Mr Sarkozy is due to meet Italian prime minister Mario Monti later today.

Investors are particularly concerned about the borrowing costs of Italy, which must pay out €100 billion in bond coupons and redemptions in the first four months of 2012 alone.
 
The euro has come under heavy selling pressure in the past few days, with offers overpowering large-lot bids that had been placed at levels above $1.30 and near $1.29, said a trader for a Japanese brokerage house in Tokyo.

"Both European real money investors and hedge funds were selling (the euro) in pretty large amounts," he said.

There are option barriers at $1.2750, $1.2700 and $1.2650, as well as a large barrier at 98.00 yen, the trader said, adding that the market may start aiming for such levels.

"In the near-term the euro may target $1.25 and after that $1.20, that is now sort of the market consensus," he said.

On technical charts, one support area for the euro is seen around $1.2600, the 76.4 percent retracement of the June 2010 to May 2011 rally.

Against the yen, the euro dipped 0.1 per cent to 98.63 yen, just above an 11-year low of 98.451 yen hit yesterday.

About the only thing that might give the euro a lift right is short-covering, said Mizuho Corporate Bank's Karakama, adding that Japanese investors, if anything, may still have some euro denominated assets that they want to sell.

"I think we need to keep in mind the possibility of fund repatriation by Japanese players. It's not nearly a situation where they can take on risk," Mr Karakama said, adding that the euro may drop to as low as 93 yen during 2012.

One near-term focal point is US jobs data due later today, after a measure of US private-sector hiring surged in December.

The safe haven dollar has often come under pressure when economic data bolsters optimism about US and global growth and gives a boost to risk-sensitive currencies and assets.

But with investors preoccupied with the euro zone's debt crisis, even a strong reading from US jobs data is unlikely to spur aggressive moves toward risk-taking or dollar-selling, market players said.

"In the past, that would have helped trigger buy backs in the euro," said Mizuho Corporate Bank's Karakama.

"As things stand now, it looks like nonfarm payrolls will probably be strong but my sense is that we won't see active buy backs in the euro even if that happens," he said.

The dollar edged up 0.1 percent against the yen to 77.22 yen, pulling away from a two-month low of 76.30 yen hit earlier this week.