The euro held steady against the US dollar on Wednesday as investors held out hopes European leaders will make progress on solving the debt crisis at a key summit this week, but any further gains should be limited. France and Germany will lay out a plan to amend the EU treaty to anchor stricter budget discipline in the euro area, aiming to restore market trust and prevent the sovereign debt crisis spiralling out of control.
A senior German official, however, dampened some market optimism, saying Berlin is increasingly pessimistic about the chances of a deal because some governments don't seem to grasp the gravity of the situation. Expectations the European Central Bank, which is widely expected to cut interest rates by 25 basis points on Thursday, may step up support for banks and troubled eurozone economies, also helped the euro.
"The market doesn't want to be too short going into the ECB meeting and then the EU summit later this week," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. A key focal point of the summit is whether eurozone leaders make enough progress toward fiscal integration and more stringent budgetary discipline to open the way for the ECB to take a greater role in stabilising eurozone bond markets.
"The risk is that we get a surprisingly positive outcome from the EU summit. In other words, more steps for closer fiscal integration than the market is currently expecting. That would ultimately help the euro in the near term." The euro last traded slightly up at $1.3406. It briefly edged lower after Standard & Poor's placed the European Union on watch for a possible credit downgrade. The ratings agency this week placed 15 eurozone nations on watch for possible downgrade.
Investors are also focusing on possible initiatives to increase the capabilities of eurozone rescue funds that could help backstop eurozone governments hit by debt market turmoil. Dean Popplewell, chief currency strategist at OANDA in Toronto, said the cautious comments from Germany weighed on risk sentiment.
"Germany is basically saying that, be wary there may not be a solution to the debt crisis coming out of the EU summit," he said. "This has obviously led to people paring back their risk positions such as the euro. Investors are currently waiting on the sidelines at the moment." A five-year German Bund auction soothed some concerns that investors may start shunning the eurozone's strongest economy.
"We expect more choppy trading in the coming sessions, with a bias for further euro losses if the ECB moves more aggressively than expected and/or the EU leaders' summit falls short of achieving a breakthrough," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. Figures released on Wednesday showed just how urgently some European banks need help.
The euro was down 0.2 percent at 1.2387 Swiss francs. It earlier rose to around 1.24440 francs on trading platform EBS after the Swiss finance minister said authorities could even consider negative interest rate and capital control options to curb the franc's strength The dollar was down 0.1 percent against a basket of currencies at 78.446. It also slipped 0.1 percent to 77.64 yen.