Euro pares losses in London

The euro trimmed losses on Thursday after the European Central Bank cut interest rates by 25 basis points to 1 percent, wrongfooting some investors who had seen an outside chance of an even bigger cut. But the single currency remained at risk of selling after a eurozone official suggested the eurozone bailout fund would have only limited firepower, shaking hopes for a strong deal at Friday's summit that would quell the bloc's debt crisis.
The ECB as expected cut rates to counter the twin threats of recession and deflation in the eurozone. In more doubt is the message President Mario Draghi will deliver at a press conference starting at 1330 GMT, eyed for any hints that the bank could provide extra support to indebted eurozone members.
The euro rose to $1.3420 after the announcement on rates, from around $1.3385 beforehand, to trade flat on the day. Analysts played down the initial rise, given that the single currency has been whipped around on a regular basis in recent weeks. Investors are keen to get a better idea of the ECB's role in solving the eurozone debt crisis, as many countries are calling for it to play a larger role if European leaders agree to a comprehensive fiscal plan on Friday. Draghi hinted that the bank could be willing to act if leaders reach a deal on a "fiscal compact"
The euro was expected to take its cue from how peripheral bonds and stock markets react to Draghi's comments. If risk appetite improves, the currency could get a fleeting boost. Stannard at Morgan Stanley said the euro remained at risk of selling pressure even if the ECB announces more liquidity-boosting measures at its press conference at 1330 GMT. Such measures are seen having a limited impact on improving the borrowing situations of debt-stricken countries.
The euro slipped earlier in the day after a senior eurozone official told Reuters the eurozone may agree to a smaller-than-expected loan to the IMF to help weak countries, while a proposal to allow a permanent eurozone bailout fund to access ECB funds was off the table.
The euro has recovered from a seven-week trough of $1.3213 in late November, but analysts say this is the result of profit taking on the single currency's recent losses, rather than a build-up of fresh bets the euro will rise. Many periphery eurozone debt yields remain high, but they have retreated from a surge to lifetime highs hit last month, suggesting bond markets have resisted a massive sell-off so far even as countries struggle to get their borrowing under control.
A key focal point of the summit is whether eurozone leaders make enough progress towards fiscal integration and more stringent budgetary discipline to pave the way for the ECB to take a greater role in stabilising bond markets. The euro was down 0.4 percent against the yen at 103.71 yen and flat at 1.2380 Swiss francs.
The dollar fell 0.2 percent against a basket of currencies to 78.342 and slipped 0.4 percent against the yen to 77.38 yen. Sterling was unchanged on the day at $1.5711, showing limited reaction to the Bank of England's decision to hold interest rates at a record low of 0.5 percent while keeping its asset-buying programme unchanged.