The euro edged higher against the dollar on Friday but stayed on track for its worst weekly performance in more than three months, with the threat of eurozone sovereign downgrades keeping investors wary of buying the common currency. The single currency has fallen around 2.6 percent on the week, its worst performance since September, after a key European Union summit last week failed to provide respite to turbulent eurozone bond markets and cash-starved banks.
The euro rose 0.15 percent to $1.3034, with traders reporting thin end-of-year liquidity. It held above the $1.30 level and hovered close to a session high of $1.3045, reached on light short-covering prompted after Thursday's well-bid Spanish auction on Thursday and solid US economic data.
"There's a bit of consolidation in the euro after a couple of days of heavy selling," said UBS currency strategist Chris Walker. Analysts said a threat of downgrades from rating agency Standard & Poor's, which put a raft of eurozone countries on review ahead of the summit, continued to hang over governments including Germany and France.
Some traders said the euro could be poised for a recovery given the extent of its fall this week and topside stop loss orders were seen around $1.3065-$1.31. But most market players said they expected any short-covering rally to be limited by wider political uncertainty.
Earlier this week the euro dropped to an 11-month low around $1.2945 and a break below that level would open the door to a test of the January low around $1.2871. Analysts said investors were concerned some European Union states may develop cold feet over proposals on a tighter fiscal regime that were the centerpiece of the summit.
In the options market, one-month euro/dollar implied volatilities hit a 3-1/2-month low around 12.7, coming further off the elevated levels that prevailed in recent months. Option traders attributed the decline to many institutions closing their books ahead of the Christmas holidays, rather than to reduced anxiety about the eurozone debt crisis.
The euro was steady versus the Swiss franc at 1.2240 francs after sustaining heavy losses on Thursday when the Swiss National Bank held its cap on the franc at 1.20 per euro, dampening talk that they may raise the peg. A slightly firmer euro saw the dollar index fall 0.2 percent to 80.164, although it remained in sight of an 11-month high of 80.730 hit on Wednesday. Commodity currencies were boosted by dip-buying and stronger bourses in Asia, with the Australian dollar up 0.7 percent at $0.9983. The New Zealand dollar was also well bid, paring the previous day's losses and adding 1.25 percent to $0.7618.