* EU leaders meet to discuss spreading debt crisis
* Euro could fall back to recent low beneath $1.30
* Fed meeting also in focus; US data could boost dollar
(Adds outlook, comment, updates prices, changes byline)
By Wanfeng Zhou
NEW YORK, Dec 10 (Reuters) - The euro should extend losses
against the dollar next week as a meeting of European Union
leaders will likely heighten concerns about deepening divisions
within the bloc over how to solve its debt crisis.
The euro slipped toward $1.3150 on Friday and was on track
to post a decline of 1.2 percent versus the dollar this week.
Technical charts point to more downside, suggesting the euro
could fall back toward its December low of $1.2970 in the
coming weeks.
EU heads of state and government meet on Dec. 16-17 to
discuss the region's spreading debt crisis. Expectations of
meaningful progress are low after Germany and France on Friday
rejected calls for an increase in the bloc's rescue fund and
joint sovereign bonds. For details, see []
"Clearly, there's been much less consensus on the long term
stability mechanism such as the euro bond proposal," said Aroop
Chatterjee, currency strategist at Barclays Capital in New
York. "We expect the euro/dollar to continue to be pressured
lower until some solutions are put in place.
"Our view is that the euro will make it out of this
sovereign debt issue, but it's going to obviously require
political will," he said.
The euro last traded 0.1 percent lower at $1.3227
<EUR=EBS>, after hitting a session low of $1.3178 on trading
platform EBS. The next key target is $1.3150, followed by its
200-day moving average around $1.3115, traders said.
Ireland's government will seek parliamentary approval for
an 85-billion-euro IMF/EU rescue package next week, though
there were concerns about political infighting as the
opposition Labour Party pledged to vote against it.
[]
Against the yen, the dollar rose 0.2 percent to 83.86
<JPY=EBS> and was up 1.5 percent this week.
The sharp rise in U.S. Treasury yields over the past week
has boosted the dollar especially versus the yen on the view
that the Obama administration's proposed tax cut extension
would spur economic growth.
Higher bond yields tend to boost the greenback as they
increase the return on dollar-denominated assets.
"We suspect the path of U.S. yields will remain the key
driver of the U.S. currency's path in the near-term," said Nick
Bennenbroek, head of currency strategy at Wells Fargo in New
York.
The U.S. dollar <.DXY> index, which tracks the greenback's
performance against a basket of major currencies, was flat at
80.043, struggling to break through the 80.00-81.50 barrier
that capped its November rally.
FOMC, US DATA
In the United States, focus will be on the Federal
Reserve's December monetary policy meeting on Tuesday, though
investors expect few surprises from the post-meeting
statement.
The Fed committed to buy $600 billion in government bonds
at its November meeting in an effort to support a struggling
economy.
A wide range of economic data will also be released next
week, including retail sales, consumer and producer prices, and
housing starts.
"We expect U.S. data to continue to remain firm," said
Barclays' Chatterjee. "U.S. yields will likely go higher and
risky assets will likely remain firm, so you probably would
expect the dollar to do better against the lower yielding
currencies such as the yen and euro."
Some analysts say dollar/yen could play catch up as yield
increases further. Given current rate spreads at the 10-year
sector of the curve, there is a growing consensus that
dollar/yen spot should perhaps be trading closer to the 87-88
range, they said.
Dollar/yen is also the standout performer in the options
market with apparently high demand for bullish structures.
"From a valuation perspective, the yen is simply
overvalued," said Vasileios Gkionakis, macro strategist at
Fulcrum Asset Management LLP in London. Fulcrum oversees about
$900 million in assets.
Gkionakis expects the dollar/yen to trade around 85 in the
short term and said the fair value for dollar/yen is probably
around 100-104.
(Additional reporting by Gertrude Chavez-Dreyfuss and Julie
Haviv; Editing by Chizu Nomiyama)
