LONDON: The euro hobbled near an 11-month low against the dollar on Tuesday and remained at risk of more selling if Italy struggles to sell government debt later in the week, highlighting how the euro zone debt crisis has worsened.
The dollar was a touch weaker versus a basket of currencies, but rates in general were little changed in extremely thin trade. UK markets were closed on Tuesday.
With little economic data and few events scheduled for the last week of 2011, investors awaited Italian auctions of three- and 10-year government bonds on Thursday.
Rome's borrowing costs have surged in recent months to put yields around levels considered by many in the market to be unsustainable and raise speculation that the country may require a bailout.
Italy has managed to sell official debt to the market, although solid demand has done little to prevent yields from rising. Analysts said that even if investors flock to the longer-dated bonds, the euro would face selling pressure if yields climb higher after the auction.
"I think there could be some downside risks for the euro. (Thursday's auction) will be more of a test of the market, given that the bonds auctioned are longer maturities," said Sverre Holbek, currency strategist at Danske Bank in Copenhagen.
"A further rise in Italian yields should almost certainly be euro negative, and thin liquidity may exacerbate the move."
Any verdict from ratings agencies on the health of euro zone countries - speculation has grown about a downgrade to the credit ratings of governments including France - could put the single currency under more selling pressure.
The euro traded at $1.3070, little changed on the day. A fall below $1.2945, a level touched earlier in the month, would take the single currency to its weakest level since January.
The dollar slipped to 79.838 versus the currency basket , but hovered in range of 80.730 hit in mid-December, its strongest since the start of the year.
Against the yen, the US currency was flat at 77.90 yen. The pound edged up 0.2 percent to $1.5660.
SHORT EURO BETS
Many expect the euro to stay weak in the near-term, as reflected in the consistently high level of bets among speculators that the single currency will weaken more.
These have piled up in past months, leaving them around record high levels as of last week according to the latest IMM data on speculator positioning.
Analysts at Citi said this reflected a bias among investors to shun the euro and other currencies perceived to be higher risk as 2011 winds down, particularly given difficult trading conditions this year.
In a note, they said this would keep trade subdued in the last trading days of the year, in contrast to some other years when currency movements, particularly versus the dollar, have become volatile as investors close positions at the last minute.
"The tactical implication is that in the final trading days of the year positioning may present less of a risk for volatility than commonly perceived," they said.
However, some in the market see the risk that the euro may initially climb on strong Italian auction results if a resulting slide in Italian yields prompt investors to cut back on those short euro positions.
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