SINGAPORE: The euro inched higher on Wednesday with markets cautiously optimistic that European leaders would take decisive action to contain the region's debt crisis at a summit later this week.
The euro rose 0.1 percent to $1.3418, staying above the previous day's low around $1.3334. The bounce back through Friday's trough of $1.3363 means its corrective rise from $1.3213 in late November remains intact, traders said.
Still, the limited scope of the euro's bounce suggests that market players remain cautious about its outlook, said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
"Although it's supported against the backdrop of pretty strong expectations, I think there is certainly still some hesitation to be too optimistic given the disappointments we've had in the past," Kotecha said, referring to market expectations for a European Union summit on Friday.
A focal point is whether euro zone leaders make enough progress toward fiscal integration and more stringent fiscal discipline to open the way for the European Central Bank to take a more active role in stabilising euro zone bond markets.
Another is possible initiatives to increase the capabilities of rescue funds that could help backstop euro zone governments hit by debt market turmoil.
Euro zone officials have said euro zone leaders may decide on Friday to raise the combined lending limit of their temporary and permanent bailout funds to boost the firewall they hope will contain the spread of the sovereign debt crisis.
Even if significant progress on such issues is made at the summit, doubts about their implementation could limit any gains in the euro, said Credit Agricole's Kotecha.
"There's still a lot of questions to be asked... If we do see this two-tier bailout fund, where is that money coming from?" he said, adding that any rally in the euro may be limited to levels around $1.3550 in the short term.
Disappointing results could drag the euro down to levels near $1.3215, with a clear breach of that support opening the way for a drop down to the $1.3140/50 area, he added.
ECB MEETING
Another key event this week is the European Central Bank's policy decision on Thursday.
The ECB is seen likely to cut interest rates by 25 basis points to 1.0 percent.
The central bank is also seen likely to offer ultra-long liquidity operations to support banks, while leaving the door open to further measures to fight Europe's debt crisis if governments agree on fiscal reforms.
"We see scope for some additional short covering between now and the weekend, barring an EU summit failure. One caveat being if the ECB surprises with more aggressive easing on Thursday than the 25-basis-point reduction in the refinancing rate that is generally expected," analysts at BNP Paribas said.
The Swiss franc stayed on the defensive versus the euro after a fall in consumer prices to two-year lows boosted speculation the Swiss central bank will weaken the currency further to shield the economy from the risk of deflation and recession.
The euro rose 0.1 percent against the Swiss franc to 1.2419, hovering near a three-week high of 1.2430 hit on Tuesday.
Against the yen, the dollar held steady at 77.74 yen, with no real trend in sight.
The Australian dollar got a modest lift from data showing Australia's economy grew a brisk 1.0 percent in the third quarter from the previous three months. Total output was 2.5 percent higher than the same quarter last year.
The Australian dollar rose to an intraday high of $1.0278 on the data. After giving back some of its gains, it fetched $1.0258, up 0.1 percent from late US trade on Tuesday.
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