* EU leaders agree permanent crisis mechanism
* Peripheral bond yields rise as pressure remains
* Spanish bond auction sees solid demand, higher yields
(Adds details, updates prices)
By Wanfeng Zhou
NEW YORK, Dec 16 (Reuters) - The euro rose against the
dollar on Thursday, but remained vulnerable to selling after an
agreement by European Union leaders to set up a permanent
crisis management mechanism failed to calm fears about the
region's spreading debt crisis.
EU leaders agreed at a summit on Thursday to make minor
changes to the group's governing treaty to establish a
permanent mechanism from mid-2013 to resolve sovereign debt
problems, diplomats said. For details, see []
A draft statement, to be issued at the end of the two-day
summit, showed euro zone leaders will declare their readiness
to ensure adequate funds are available for the euro zone rescue
fund, the European Financial Stability Facility (EFSF).
But analysts expect the euro to remain under pressure as
European policymakers still appear divided over more concrete
measures, such as making more money available to the European
Financial Stability Facility or issuing joint European
sovereign bonds, or "E-bonds." []
"Market participants continue to reduce exposure to the
euro," said Samarjit Shankar, managing director of global FX
strategy at BNY Mellon in Boston.
"The ongoing policy discord about measures required more
urgently to tackle contagion is spooking investors," he said.
The euro rose 0.2 percent to $1.3236 after falling to a
session trough of $1.3181 on trading platform EBS <EUR=EBS>.
Sell-stops are reportedly building at $1.3160, traders
said, with resistance seen at $1.3215 and $1.3265.
Government debt yields for Spain, Portugal and Italy edged
higher on Thursday, even after Spain sold 2.4 billion euros in
10- and 15-year bonds in an auction that traders said went
smoothly. []
Shankar said BNY's bond flow data showed investors continue
to shun Spanish, Italian, Portuguese, Irish and Greek exposure.
He said the data also showed fresh net outflows from German
Bunds.
"Portfolio managers pare euro zone exposure mostly across
the board for now -- there is ongoing uncertainty about the
extent to which Germany may agree to shoulder some of the
burden of assisting the peripheral nations," he said.
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Euro zone graphic package: http://r.reuters.com/hyb65p
More on euro zone debt: []
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DOLLAR AND YIELDS
Against the yen, the euro was down slightly at 111.17
<EURJPY=>, while the dollar fell 0.3 percent to 84.02
<JPY=EBS>.
U.S. Treasury debt prices ended higher on Thursday after
fluctuating throughout the day as buyers tentatively stepped in
to take exposure to government bonds at more attractive yields.
[]
Earlier, the dollar had risen after bond yields advanced
after data showed new U.S. claims for jobless aid fell last
week and factory activity in the mid-Atlantic region grew at
its quickest pace in more than 5-1/2 years this month.
[]
"The data turned Treasuries around and as U.S. rates backed
up, the dollar went with them," said Brian Dolan, chief
strategist at Forex.com in Bedminster, New Jersey.
The dollar had gained earlier this week as benchmark
10-year Treasury yields hit seven-month highs, pushing the
dollar to a three-month peak at 84.51 yen on Wednesday.
While a further rise in U.S. bond yields was seen helping
the dollar for now, 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," said Jane Foley, senior currency strategist at
Rabobank.
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.
