The euro pared losses from a 10-year low against the yen and edged slightly higher against the US dollar today, nearing the end of a year of stumbles that could presage more of the same in 2012.
The single currency fell to 99.963 yen on the EBS trading platform, breaking below an options barrier at 100.00 yen. The euro last traded at 100.15 yen, according to Reuters data. The euro is down about 7.8 per cent against the yen for the year.
Thin trading exacerbated volatility, with many traders out for the end-of-year holidays.
But analysts said the euro was likely facing a bleak year as the euro zone sovereign debt crisis, which has roiled markets for two years, rages on.
"The currency markets are going to continue to take their cue from fixed income and sovereign credit markets" in 2012, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"Particularly we'll be looking at Italian and Spanish debt and those nations' ability to access reasonably priced capital."
In a move to cut back its budget deficit and reassure markets, Spain's government said today that the country would cut €8.9 billion of spending next year across all ministries, as well as raising some taxes.
But the government also said that the 2011 deficit would be higher than expected.
The single currency reversed an early dip against the US dollar to advance 0.08 per cent to $1.2972.
Helped by investors squaring positions before year-end, it recouped losses from yesterday, when it sank to a 15-month low of $1.2858 as high yields at an Italian bond auction prompted euro selling.
"The euro has held up relatively well given the crisis we've seen, but that view is likely to come under pressure in the new year," said Simon Smith, economist at FXPro.
"There is huge focus on what's going on in Europe. Next year is likely to be the year when either euro zone leaders send the region on a path towards greater fiscal integration or we see some of the more vulnerable countries having to leave."
Traders said falls in the euro versus the yen were partly driven by the dollar extending losses against the Japanese currency after triggering stop loss orders on the break below 77.50 yen.
The dollar index was at 80.159, off a near one-year peak of 80.854 hit yesterday.
This year the euro has lost more than 3 per cent versus the dollar, adding to a 6.6 per cent decline in 2010.
But the relatively modest drop belies the currency's volatility this year, as the 17-nation monetary union lurched from problem to problem as policymakers failed to staunch the sovereign debt crisis.
Some analysts said the currency could drop as low as $1.20 by the end of 2012 in the absence of a comprehensive policy response to the crisis, potentially moving towards its 2010 low of $1.1876.
Italy, the euro zone's third-largest economy, remains at the centre of the debt crisis that began in Greece two years ago, and its borrowing needs could overwhelm the bloc's financial defences if it were forced to seek an international bailout.
Ten-year Italian yields are above the 7 per cent level seen as unsustainable, with the country needing to raise €450 billion in debt markets in 2012. Government issuance of new euro zone debt will be scrutinised for any sign investors are shunning the currency.
Analysts expect euro zone funding pressures to intensify in early 2012, with €230 billion of bank bonds, up to €300 billion in government bonds, and more than €200 billion in collateralised debt maturing in the first quarter.
Last week the ECB provided banks with almost half a trillion euros in three-year loans at low rates to encourage lending. Some policymakers have urged banks to use the funds to buy Italian and Spanish sovereign debt.
But the latest ECB data on Friday suggested banks were hoarding the cash, with €445 billion being deposited in the central bank's overnight facility, up from €436 billion the previous day.
"If the euro is going to be salvaged the market needs an injection of faith over the next few weeks. The Italian and Spanish auctions are key," said Neil Mellor, currency strategist at Bank of New York Mellon.
Reuters