The euro ended little changed against the US dollar Thursday, but was on track to close out the year lower, as investors were unconvinced European leaders were anywhere close to a solution to the region's debt crisis. Market players said the looming threat of euro zone sovereign credit rating downgrades also kept investors on edge and any rally was viewed as an opportunity to lock in profits.
Analysts also said the European Central Bank's first-ever tender of ultra-cheap three-year loans Wednesday gave little support to the euro. Doubts remained over how much of the funds will be lent to boost the ailing eurozone economy or used to buy peripheral sovereign bonds as banks deleverage and cut back exposure to government debt.
"European leaders are not doing the things necessary to fix the crisis," said Paul Dietrich, chairman and chief investment officer at Foxhall Capital Management in Orange, Connecticut. "They talk, but they're not backing up the talk with anything like what we did in the United States. And it's not the sovereigns that is causing this crisis, but the banks themselves."
Dietrich, who manages about $700 million in assets, said 75 percent of his portfolio is in short-term and intermediate US Treasuries as a hedge against the European debt situation. In late afternoon trading, the euro was last at $1.30432, little changed from the prior close and well off the session peak of $1.31200 on trading platfrom EBS. It was around a cent from the 11-month low struck last week.
For the year, the euro was down around 2.6 percent against the dollar, posting lower losses than it did in 2010, when the single currency dropped 6.6 percent. The currency's relatively steady performance this year could be attributed to deleveraging by eurozone banks, which have been selling foreign assets to stay liquid. Proceeds of these sales are being repatriated back into the eurozone, cushioning the euro against further declines.
On Wednesday, 523 banks borrowed nearly 490 billion euros from the ECB in a move that initially eased short-term funding pressure. But analysts were skeptical as to whether the liquidity could alleviate funding tensions for some eurozone sovereigns.
"The increased liquidity is consistent with our medium- to longer-tern view that the euro is likely to become a funding currency in 2012, especially as we expect the European Central Bank to cut rates further early in the new year," said Ian Stannard, currency strategist, at Morgan Stanley in London. There was little evidence that the banks would be keen to use the funds to buy Italian and Spanish debt and help pull the borrowing costs of those countries lower.
The dollar benefited from a report showing new US claims for unemployment benefits dropped last week to the lowest level in more than 3-1/2 years, suggesting the labour market recovery was gaining speed. The dollar index though was down 0.1 percent on the day at 79.940. The US dollar was up 0.1 percent against the yen at 78.160 yen. It has been tied to a roughly 2-yen-wide band since Tokyo stepped into the market to stem its currency's strength on October 31.