By Patrick Graham
The euro sank to its lowest since September 2010 against the dollar on Thursday while the European Central Bank moved to support Italian bond markets after a debt sale did little to settle nerves about a daunting first quarter for Rome's finances.
European shares held in positive territory in holiday-thinned trade, however, and stock index futures pointed to a steady open on Wall Street. Oil also steadied above $107 a barrel, still showing the impact of Iran's threat to block the Straits of Hormuz, a vital trade route.
Dealers reported the ECB was buying small quantities of Italian bonds on the open market after the closely-watched auction showed 10-year yields still close to levels at which other euro zone governments have been forced to seek bailouts.
The gap between Italian and German benchmark debt yields had soared to 525 basis points ahead of the tender, reflecting concerns over Rome's ability to refinance more than 150 billion euros in debt in the first few months of 2012.
"(Today's result) underscores that the genuine pressure on Italy is still tremendous, despite bold ECB actions that have given the short end a big boost," said Commerzbank strategist David Schnautz.
There had been optimistic signs for Rome in a halving of its cost of borrowing over six months on Wednesday, but the sale of longer-term paper was a sterner test of investors' faith in its ability to service a huge public debt burden.
It was also the first test of banks' willingness to buy longer-term sovereign debt with the nearly 500 billion euros in three-year funds that they borrowed last week from the ECB.
In the event, Italy sold 2.5 billion euros of its 10-year benchmark bond, the top planned amount, but the yield of 6.98 percent was not far off a euro lifetime record of 7.56 percent a month ago.
The euro fell around half a percent to $1.2858 in response - leaving it hanging close to a further break lower. Against the yen, it reached a 10-year trough of 100.33 yen on the EBS trading platform, driven by selling from Japanese retail investors and exporters.
London's FTSE .FTSE stock market inched down 0.1 percent, while markets in Frankfurt and Paris .GDAXI .FCHI rose around 0.3 and 0.2 percent respectively.
Japan's Nikkei .N225 earlier ended 0.3 percent lower and the MSCI ex-Japan Asia Pacific index .MIAPJ0000PUS also shed 0.3 percent, dragging the MSCI index of global shares .MIWD00000PUS down 0.16 percent.
EURO NERVES
The ECB's injection of cash, together with the lull in markets at the end of the year, has eased some of the immediate pressure on Italy and Spain in a debt crisis dating back more than two years.
But despite being awash with liquidity, banks still appear distrustful; they deposited 437 billion euros with the ECB's overnight facility on Wednesday rather than lend to each other - just off a record reached a day earlier - while emergency overnight borrowing also remained high at above 4 billion euros.
Worries over banks and government debt look set to continue to weigh on the euro in 2012, especially given signs of improvement in the U.S. economy that may support the dollar.
With the euro having broken decisively below $1.30, many expect a move towards $1.25 in the coming months.
"The euro remains biased towards the downside, not just from a debt crisis perspective, but also from a fundamental perspective, with the European Central Bank expected to move towards more aggressive quantitative easing," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
"The Italian auction result was not a disaster, yields were lower, but the bid-to-covers were a bit weaker, so it's certainly not an all-clear on the debt crisis."
Brent crude oil rose 1 cent to $107.57 a barrel after falling nearly $2 the day before, with a stronger dollar and rising U.S. crude stocks offsetting the concerns over Iran.
Spot gold fell more than 2 percent to $1,521.94 an ounce.
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