* Short-covering, ECB boost euro ahead of weekend
* Debt crisis still points to weaker single currency
* U.S. budget deficit debate could sway sentiment
* Euro short bets rise in latest week
NEW YORK (Frankfurt: A0DKRK - news) , Nov 18 (Reuters) - Investors will remain wary of placing bets in favor of the euro, with issues on both sides of the Atlantic (Stuttgart: A0J3C9 - news) likely to contain risk appetite.
While the euro rose against the dollar on Friday on the possibility the European Central Bank and the International Monetary Fund will bail out bigger euro zone economies and borrowing costs for Italy and Spain eased, sentiment remained bearish.
The common currency fell for three straight weeks as fears persisted that the debt crisis could engulf major euro zone states such as France and trigger a break-up of the 17-nation bloc.
"While we had some consolidation today, the overall dynamics for the euro remain weak and we expect it to end the year at around $1.29," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
"There is not much clarity on what is needed to support the euro zone as a whole," he said. "The ECB remains reluctant to increase purchases of periphery bonds and the EFSF (European Financial Stability Facility) has not yet been fully implemented."
Yields on Italian and Spanish bonds eased after the ECB stepped in to stabilize the market, but fears remain that both countries' borrowing costs are at unsustainable levels. For more, see: [ID:nL5E7MI24O]
Euro zone officials said there have been discussions that the ECB could lend to the IMF (Berlin: MXG1.BE - news) to provide the fund with enough money to bail out even the biggest euro zone countries. [ID:nL5E7MH2MW] Pressure has also mounted on the ECB to step up its bond purchases.
Economists say only the ECB would have enough fire power to quell a confidence crisis spreading throughout the euro zone. But EU law forbids the bank to finance government borrowing directly, thus the possible arrangement with the IMF.
"Right now there is no buyer of last resort for the bonds and while austerity measures can boost short-term confidence, they are not a panacea," McCormick said. "The headwinds in Europe (Chicago Options: ^REURUSD - news) are potent and acute."
Many analysts believe the only way to stem the contagion in Europe is for the ECB to buy up large quantities of bonds, effectively the sort of "quantitative easing" undertaken by the U.S. and British central banks.
Bond market participants polled by Reuters saw a 50/50 chance that the ECB will expand bond purchases to engage in outright quantitative easing. [ID:nL9E7J203E]
Many economists say the euro zone is on the brink of another recession. This could prompt the ECB to cut interest rates again, a negative for the euro, as it would make higher-yielding currencies more appealing.
The euro last traded up 0.4 percent at $1.3514 on Reuters data, pulling away from a five-week low of $1.3420 struck on Thursday. On the week, the euro was down about 2 percent versus the dollar.
The dollar could gain on risk aversion next week given that a high-profile effort to trim stubborn U.S. budget deficits appeared near collapse on Friday as Democrats and Republicans were unable to agree on tax increases and benefit cuts. [ID:nN1E7AH0HA]
The 12-member "Super Committee" in Congress has until midnight on Wednesday to strike a deal that would save at least $1.2 trillion over 10 years.
Spanish elections set for Sunday could help support a rise in the euro against the dollar in the very near-term, because the opposition party, which is seen as favoring austerity measures, is expected to win. But most see a downward trend in the euro. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Analysis of policy options [ID:nL5E7MF2XJ]
Other stories on euro zone debt crisis [ID:nL5E7LR1WL]
Countdown for euro zone rescue [ID:nL5E7MF2XJ]
Analysis on difficulty of breakup [ID:nL5E7MF1PJ]
Euro zone crisis in graphics http://r.reuters.com/hyb65p
Interactive timeline http://link.reuters.com/rev89r
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Currency speculators raised their bets in favor of the U.S. dollar in the latest week to their largest in a month, according to data from the Commodity Futures Trading Commission released on Friday. [ID:nN1E7AH1JL]
"What is surprising is how little the USD has gained over the last few months, not how much it has gained," said Steven Englander, global head of currency research at CitiFX, a division of Citigroup (NYSE: C - news) , in New York.
"The key to more pronounced USD strengthening would be backing away from the Fed (Federal Reserve) from its 'no hike ever' rhetoric or a complete euro zone collapse," he said. "Barring such moves, the inclination of investors will be sell USD as soon as risk appetite stops deteriorating."
Against the yen, the dollar slid as low as 76.575 on trading platform EBS , the weakest level since Japan (EUREX: FMJP.EX - news) 's massive intervention on Oct (KOSDAQ: 039200.KQ - news) . 31. It was last down 0.1 percent at 76.86. (Additional reporting by Gertrude Chavez-Dreyfuss and Wanfeng Zhou in New York and Nia Williams in London; Editing by Dan Grebler)
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