* Euro <EUR=> up 0.2 pct, but investors wary of EZ debt
* EU summit not seen offering solution to debt crisis
* Spanish bond auction produces solid demand, higher yields
(Adds quote, updates prices)
By Tamawa Desai
LONDON, Dec 16 (Reuters) - The euro edged higher on Thursday
ahead of a European Union summit but was vulnerable to a
sell-off on lingering euro zone peripheral debt concerns, while
the dollar fell after a pause in U.S. Treasury yield gains.
European leaders sought to paper over deep divisions on how
best to resolve the debt crisis ahead of a summit on Thursday,
and Spain and Portugal came under renewed pressure to get their
finances in order. []
"The forex market has gone into this with a high degree of
hope for some signs of consensus from political leaders ...
although I doubt there will be any additional clarity on euro
bonds or enhancing the bailout fund," said Jane Foley, senior
currency strategist at Rabobank.
"If they (politicians) give an impression of many
differentiating factions, the market would react quite badly."
Euro zone policymakers are toying with a number of ideas to
fall back on if moves to create a permanent European Stability
Mechanism for solving debt crises fail to calm financial markets
next year. []
The euro was up 0.2 percent at $1.3240 <EUR=> after falling
more than 1 percent on Wednesday. Traders said bids from Asian
central banks were seen around $1.3200, and on the charts
support is seen around $1.3165, the low hit on Nov. 9.
Option expiries were being cited at $1.3200, $1.3250 and at
$1.3300. Traders said liquidity was showing signs of drying up
as the year end was approaching and this was likely to increase
the potential for sharp moves.
The euro hit the day's highs after results from an auction
of Spanish 10-year and 15-year bonds on Thursday, a day after
ratings agency Moody's said it could downgrade Spain's rating.
The auction resulted in higher yields but solid bid-to-cover
ratios. []
"Spain is not in a situation where it would have trouble
servicing its debt, so the auction saw enough demand," said Lutz
Karpowitz, senior currency strategist at Commerzbank in
Frankfurt. But others added the higher yields indicated
continued wariness about euro zone debt.
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Euro zone graphic package: http://r.reuters.com/hyb65p
More on euro zone debt: []
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Government debt yields for Spain, Portugal and Italy rose
after the Spanish bond auction, highlighting those concerns.
DOLLAR LOSES STEAM
The dollar lost ground as U.S. Treasury yields eased and the
dollar index was down 0.23 percent at 80.08 <.DXY>.
It had gained earlier this week as benchmark 10-year
Treasury yields rose, hitting seven-month highs at 3.565 percent
and pushing the dollar to a three-month high against the yen at
84.51 yen <JPY=> on Wednesday. On Thursday, the dollar slipped
back to 84.05 yen.
A strong reading in weekly U.S. jobless claims could push
Treasury yields up again, traders said.
While a further rise in U.S. bond yields was seen helping
the dollar, some market players noted a breakdown in the
dollar/yen's correlation with U.S. bond yields and with
U.S.-Japan yield spreads.
"It's too early to say with conviction, but it could be due
to an emergence of bearish factors, such as the U.S. fiscal
situation," Rabobank's Foley said.
The Swiss franc dipped against the euro <EURCHF=R> after the
Swiss National Bank left interest rates unchanged as expected
and said it would take all measures necessary should the euro
zone crisis lead to renewed deflation threats in Switzerland.
[] []
The Swiss franc hit a record high of 1.2758 francs per euro
on trading platform EBS on Wednesday, but was down against the
single currency.
"Last time they were talking about combating deflation they
intervened on the FX markets (to weaken the franc)," one
London-based trader said. "With some euro negatives priced in
the recent brutal sell-off, the euro/Swiss franc cross could
extend its gains in the near term."
(Additional reporting by Anirban Nag; Editing by Hugh Lawson)
