(Reuters) - The euro slipped on Thursday as investors were unconvinced European leaders were anywhere close to a solution to the region's debt crisis, prompting investors to sell into any rebounds in the single currency.
Market players said the looming threat of euro zone sovereign credit rating downgrades also kept investors on edge.
Analysts also said the European Central Bank's first-ever tender of ultra-cheap three-year loans on Wednesday gave little support to the euro. Doubts remained over how much of the funds will be lent to boost the ailing euro zone economy or used to buy peripheral sovereign bonds as banks deleverage and cut back exposure to government debt.
European leaders are not fixing the crisis and they are not doing the things necessary to fix it, 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 U.S. Treasuries as a hedge against the European debt situation.
We are in a defensive mode right now. This is not the time to be exploring other markets as I see a lot of potential negatives arising from the European debt crisis.
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 euro zone banks, which have been selling foreign assets to stay liquid. Proceeds of these sales are being repatriated back into the euro zone, 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 euro zone 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.
2012 DEBT AUCTIONS EYED
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.
Banks are able to borrow three-year debt from the ECB at 1 percent and could invest in Spanish or Italian bonds at around 5 or 7 percent. But they may prefer to use the funds to shore up their own balance sheets.
Euro zone bond markets are expected to come under more pressure with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralized debt all maturing in the first quarter of 2012.
Some analysts expect portfolio managers will be conservative in allocating the funds, which could result in a limited outflow of euros overseas and curb selling in the single currency.
Even if banks do use the funds to buy assets, it seems most likely that these will be domestic assets, not foreign assets, Standard Bank said in a note.
It added that banks would be wary of taking on foreign exchange or even debt market risk. We could find that the cash is deposited back with the ECB or, perhaps, leaked out only into the front end of core euro zone bond markets, the bank said.
The dollar benefited from a report showing new U.S. claims for unemployment benefits dropped last week to the lowest level in more than 3-1/2 years, suggesting the labor market recovery was gaining speed.
The U.S. 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.