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Mon 9 Jan 2012 11:59 AM

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Euro hits 16-month low vs dollar, 11-year low vs yen

Markets brace for debt sales from Spain and Italy, seen as major test of investor sentiment

Euro hits 16-month low vs dollar, 11-year low vs yen

The euro hit a 16-month low versus the dollar on Monday,
hurt by negative news from the euro zone over the weekend, with the risks of
further declines seen in coming months.

The euro hit its lowest level since September 2010 of
$1.2666 on trading platform EBS at one point. Against the yen, the euro hit an
11-year low of 97.28 yen, its lowest level since December 2000.

The single currency later trimmed some of its losses and
last stood at $1.2710, down 0.1 percent from late US trading on Friday and was
changing hands at around 97.80 yen, down 0.1 percent.

"We have revised down our 3-month EUR/USD forecast to
1.25 and during the initial quarter of this year do not expect investors to
stray far from their long USD positions," Jane Foley, senior FX strategist
at Rabobank, wrote in a client note.

"Insofar as 2012 has opened to a chorus of concerns as
to whether EMU can even stay the course this year, we expect investors to
continue hunting diversification trades. EUR/JPY, EUR/AUD and EUR/CAD are all
likely to see further downside in Q1."

One support area for the euro lies near $1.2600, roughly the
76.4 percent retracement of its June 2010 to May 2011 rally.

US jobs data released last Friday highlighted the diverging
growth outlook between the United States and Europe, suggesting further
weakness in the euro/dollar pair.

The newsflow from Europe over the weekend was also far from
inspiring. German magazine Der Spiegel reported on Saturday the International
Monetary Fund was losing confidence in Greece's ability to clean up its public
finances and work off its mountain of debt.

In addition, an adviser to Germany's finance minister
Wolfgang Schaeuble told a Greek newspaper that a 50 percent write-down on Greek
debt holdings, part of Greece's debt swap deal, was not enough to put the
country's huge debt on a viable footing.

Some market players said stop-loss offers exacerbated the
euro's drop on Monday.

Underscoring the bearish view on the euro, currency
speculators boosted short positions in the currency to record levels in the
week ended Jan. 3, data from the Commodity Futures Trading Commission showed on

Markets are bracing for debt sales from Spain and Italy on
Thursday and Friday, seen as a major test of investor willingness to plough
more money into the region's troubled countries following recent steps to
address their debt problems.

After having finished 2011 some 13 percent below its 2011
high near $1.4940, the euro has started 2012 on a weak note, having shed
roughly 1.9 percent so far in January.

The euro's drop so far in 2012 has been driven by selling in
euro crosses such as euro/Aussie and euro/yen as well as euro/Asia, said Rob
Ryan, FX strategist for BNP Paribas in Singapore.

"Positioning is beginning to get a little stretched at
this stage," Ryan said. "I think we're risking some pretty fast
reversals of these moves."

Still, the single currency is unlikely to see a sustained
rebound unless the euro zone's economic outlook improves, Ryan said, adding
that the euro could fall to $1.25 in coming months.

"We need to see the [euro zone's] economic data halt
its slide and I think we need to see banks start to lend to each other. Neither
of those are going to happen overnight," he said.

Market players are worried that euro zone countries will
have a hard time making progress on fiscal consolidation unless the region's
economic outlook improves.

The euro did manage to regain some ground versus the
Australian dollar, rising 0.5 percent to A$1.2489 and pulling away from a
record low of A$1.2408 hit last week.

Weaker-than-expected Australia retail sales weighed on the
Australian dollar and gave an added boost to the euro/Aussie cross.

Against the greenback, the Australian dollar fell 0.6
percent to $1.0172.

Australian retail sales were flat in November, disappointing
hopes that lower interest rates would give a boost to demand and adding to the
case for a further cut next month.

The dollar held steady against the yen at 76.94 yen ,
staying above a two-month low of 76.30 yen hit last week.

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