The euro traded slightly stronger against the US dollar on Thursday, recovering from a 15-month low as traders covered short bets, a pattern likely to be repeated in coming months as worries about the eurozone's health continue. The currency dropped below $1.29 for the first time in 15 months earlier in the session before gaining modestly.
But the rally was driven by short-covering, traders said, and continuing uncertainty about the future of the 17-nation monetary union were likely to weigh on the euro into the first quarter of next year and beyond. "I still think it'll continue down to the $1.25 level," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.
Traders unsuccessfully targeted the 100 yen barrier, as well as trying to push the euro lower against the dollar, said Steven Butler, director of foreign-exchange trading at Scotia Capital in Toronto. "We just ran out of some momentum," he said. "It really is all about the flow this time of year." Thin trading exacerbated volatility as the year-end holiday approaches. While the euro firmed to $1.2945 on Thursday, that remained less than a cent away from a session low of $1.2856, its weakest since September 2010, and analysts said few traders were making big bets on an imminent euro rally.
Traders who were active were looking to cut exposure to the euro now before the masses rush to do it in early January, said Standard Chartered strategist David Mann. Concerns about Italy's funding needs weighed. Italy had to pay nearly 7 percent to sell 10-year bonds at an auction. That was below the euro-era record seen at previous bond sales, but still uncomfortably high for a country that needs to raise 450 billion euros through debt issuance in 2012 while facing slow growth, traders said.
The European Central Bank was active in the secondary market after the auction, traders said, buying small amounts of Italian debt and checking for prices on Spanish bonds - both of which rallied to take yields off their highest levels of the session. Analysts said the euro's decisive break below $1.30 meant this level would now act as technical resistance, with many traders expecting a move to $1.25 in the coming months.
The euro also hit a 10-year low against the yen for a second straight day. It last changed hands at 100.49 yen, down 0.29 percent. "There's a chance we could get a run at the 100 figure in euro/yen tonight, but I believe we've probably seen the greatest pressure on euro that we're going to see" for 2011, said Greg Anderson, currency strategist at Citigroup in New York.
The dollar was down 0.37 percent against the yen at 77.620 yen, while sterling fell 0.3 percent to $1.5404. The euro began its sharp decline on Wednesday after ECB data showed euro-zone banks deposited a record 452 billion euros in low-interest central bank deposit accounts, suggesting that banks were still wary of lending to each other.