NEW YORK: The euro faced make-or-break time ahead of a European Central Bank meeting and a European Union summit next week, as the single currency fell against the dollar on Friday for the first time in five sessions.
Investors were wary of placing aggressive bets in favor of the 12-year-old currency ahead of the ECB meeting next Thursday and the EU summit the following day.
French and German leaders are to meet on Monday to outline joint proposals to be discussed at the EU meeting.
"People have been playing up the fact that the euro zone is running out of time because their steps have been incremental and not big enough to calm fears," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York. "They are making progress, but everyone is looking for a game-changer."
The euro rose early on reports the ECB may lend to weak euro zone countries through the International Monetary Fund in hopes of easing the debt crisis. The euro zone's common currency was also buoyed on rising risk appetite after the US Labor Department reported the unemployment rate fell to a 2-1/2-year low in November, but it reversed course on various market rumors, which included a downgrade of Spain's debt.
Investors were also hesitant to buy the euro in the aftermath of a strong rally this week.
The ECB is expected to cut interest rates again next week, a negative for the euro because it would make higher-yielding currencies more attractive.
The ECB hinted Thursday it was ready to move more aggressively to tackle the debt crisis if regional politicians agree on much tighter budget controls, though it stopped short of detailing what exact measures it would take.
"Risks for the euro are still to the downside," McCormick said. "A move toward fiscal integration by circumventing the EU treaty and not rewriting it could be a potential positive for the euro in the short-term, but the economic landscape is much more negative for the euro and we expect it to end the year at $1.29."
In contrast, the drop in the US unemployment rate tempered expectations that Federal Reserve officials will ease monetary policy further, a positive for the dollar.
The euro fell as low as $1.33630, blowing through stops at $1.34150. It was last at $1.3398 on trading platform EBS, down 0.5 percent on the day. It rose to a 10-day high of $1.35505 immediately after the US non-farm payrolls report.
Juergen Stark, one of the European Central Bank's top policymakers, warned on Friday that leaders must urgently find a solution to the euro zone debt crisis or there will be widespread macroeconomic and financial disaster.
British Prime Minister David Cameron threatened to obstruct a Franco-German drive for swift change to the European Union's treaty, a sign of the difficulty leaders will face in transforming Europe to save the euro.
Uncertainty about the upcoming key euro zone events is likely to remain elevated, according to Greg Anderson, G10 strategist at CitiFX, a division of Citigroup, in New York.
"Past experience has also taught investors not to get overly excited about the outcome of yet another EU summit," he said.
The euro could continue to consolidate only gradually against the background of growing market expectations of a coordinated and comprehensive approach to deal with the euro zone debt crisis, he said.
Currency speculators raised their bets in favor of the US dollar in the latest week to the highest level since June 2010, according to data from the Commodity Futures Trading Commission released on Friday.
The dollar rose 0.4 percent against a currency basket , to 78.646. Against the yen, the dollar rose 0.3 percent to 77.94 yen.
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