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The euro steadied on Thursday ahead of an EU summit but looked vulnerable to further falls, while the dollar held near the top of recent ranges against several major currencies but lacked energy to vault them.
Trading conditions have become choppy as the year-end approaches, making it hard to take directional bets, although a surge in U.S. yields has boosted the dollar across the board, and took it to a three-month high of Y84.51 on Wednesday.
Treasury prices edged up on Thursday and the dollar paused, helping the euro hold just above the bottom of a range it has kept since the start of the month, ahead of an EU summit set to discuss the euro zone debt crisis.
"The move above Y84.41 yen should be a bullish sign for the dollar/yen but it does depend on U.S. yields," said Masafumi Yamamoto, chief FX strategist at Barclays. "The euro area still faces peripheral problems ... If contagion spreads to Portugal, then who's next?"
The euro's decline has been compounded by more upbeat U.S. economic data, which helped drive benchmark 10-year Treasury yields to seven-month highs at 3.565% and powered the dollar higher.
EU leaders meet in Brussels on Thursday and Friday for their end-of-year summit, with efforts to overcome the region's year-long debt crisis at the heart of their agenda.
Leaders will try to agree the next step in dealing with the debt crisis and how to stop it spreading. They will discuss changing the EU's treaty to create a permanent crisis-resolution mechanism from 2013 and might look at enlarging the existing crisis fund.
"We expect plenty of contradictory headlines. Hence, the euro is now vulnerable to a renewed move lower, with a break below initial support at $1.3170 likely to trigger a decline to recent lows in the $1.2970 area," BNP Paribas analysts wrote in a client note. "With continued pressure on peripheral spreads, today's Spanish bond auction will be important for sentiment."
Spain, which rating agency Moody's warned on Wednesday could be downgraded, is scheduled to sell up to 3 billion euros of 2020 and 2025 bonds on Thursday.
"If we see a strong reading on U.S. initial jobless claims today, we could see a fresh rally in the dollar," said a trader at a U.S. bank.
Data last week showed the four-week average of jobless claims fell to a four-year low of 427,500, raising hopes that a stagnant U.S. job market may finally be starting to gain strength.
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