Euro dips on lukewarm Italian debt sale

The euro dipped on Friday and European shares traded flat as an Italian debt sale failed to meet high expectations and Greece's debt swap deal hung in the balance, although markets welcomed signs of resilience in the broader euro zone economy.

Underpinned by a flood of three-year loans to banks from the European Central Bank, Italy's three-year debt costs fell below 5% for the first time since September, spurring hopes it would be able to make it through a looming refinancing hump.

But the tender raised less than half the 10 billion euros secured the previous day at significantly lower yields by Spain, the other major euro zone economy on the front line of the debt crisis.

The results quashed some earlier signs of risk appetite, with investors heading back to the safe havens of core government debt as Bund futures hit a new record and US Treasury futures rose to a session high.

"After the stellar bill auction in Italy and the very good Spanish auctions yesterday, there will be some disappointment in the market," Marc Ostwald, a strategist at Monument Securities, said.

"I don't think the results are disappointing but there will be market disappointment that the results weren't stronger particularly in cover terms."

The euro fell back, dipping to $1.2788 and within touching distance of a 16-month low near $1.2662. It had climbed as high as $1.2879 in Asian trading.

The FTSEurofirst 300 index of top European shares rose sharply at the open before easing back to trade up 0.4% at 1,023.42 points by 1100 GMT. It reached a five-month high of 1,031.08 on Thursday before closing 0.3% lower.

The MSCI global index rose 0.3%.

On Wall Street, stock futures pointed to a flat opening, with markets eying quarterly earnings from JPMorgan that kick off the financial reporting season. Analysts expect a year-on-year decline.

The European Central Bank struck a cautiously optimistic note on the euro zone's outlook on Thursday and left the door open to further interest rate cuts.

Hopes the region's economy might be more resilient to the crisis than feared were supported by data showing a strong trade surplus rather than the expected deficit in November.

That suggested demand in the stronger US and Asian economies and a weak euro may be helping exporters weather the turmoil closer to home.

Peripheral wobbles

Italian 10-year bond yields have fallen sharply this week but remain within striking distance of the 7% rate that has pushed other euro zone governments over the edge. They pared early gains on Friday to trade 7 basis points lower at 6.586%, off session lows of 6.48%.

"It wouldn't surprise me if peripherals continue to do well, especially with another three-year (ECB funding injection) coming up in February," Alan McQuaid, chief economist at Bloxham Stockbrokers, said

"But the critical point is the end of the month to see what the (euro zone) policymakers come up with to improve sentiment further. Sentiment is still fragile. It has been encouraged by the actions of the ECB, but politicians have to deliver as well."

Talks remained in the balance on Greece's debt swap deal, seen as vital to efforts to stave off a disorderly default of the euro zone's weakest link.

Private sector bondholders said time was running out to agree on a voluntary debt exchange, though Greek officials sounded more optimistic and French bank Societe Generale said agreement was close on a writedown of at least half the value of the debt.

Whatever the outcome, "an agreement on the Greek debt swap is unlikely to be enough to bring Greece back to a sustainable path," said Oliveri at UBS.

Brent crude fell a dollar to just above $110, with hopes a proposed European Union embargo on imports of Iranian crude would only be phased in gradually outweighing worries over supply disruption from Nigeria.

On the data front, British factory gate inflation fell more than expected in December, official data showed on Friday, boosting expectations that the Bank of England will inject more stimulus into the struggling economy soon.

Sterling fell to a two-week low against the euro following the data.