The euro fell on Wednesday and stayed within sight of a seven-month low plumbed this week as investors showed no confidence that talks between Greece, France and Germany would mark a significant step towards resolving the euro zone's debt crisis.
It came off lows, however, in tandem with a recovery in European stocks, after European Commission President Jose Manuel Barroso said options for the introduction of euro area bonds would soon be presented.
The euro was 0.15 percent lower at $1.3660 , off a low around $1.3590. Traders said it was held up by sovereign demand around the $1.3600 level. A break below there, however, could see it target Monday's seven month trough at $1.3495.
“One piece of negative news is enough to erase any recovery in euro/dollar at the moment,” said Roberto Mialich, currency strategist at Unicredit in Milan.
“If pressure continues on bigger countries like Spain and Italy and if there is no help from the Federal Reserve in the form of more quantitative easing there is a risk of euro/dollar settling into a $1.35-$1.30 range”.
Traders cited talk of growing offers above $1.3670 which were seen capping any gains in the euro.
Concerns about the fragility of the euro zone banking sector knocked sentiment after Moody's earlier cut the credit ratings of two major French banks, pressuring the euro and high-yielding currencies like the Aussie dollar.
Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to hold a conference call later on Wednesday.
Markets were hopeful it may result in support for Greece and tame concerns about a Greek default but they were not confident any agreement would be enough to stem contagion to larger euro zone countries such as Italy and Spain.
The euro gave up earlier modest gains which had been made on short-covering by hedge funds after news of the teleconference emerged.
Alarm over euro zone's debt has reached new highs and on Tuesday Italy was forced to offer the highest interest on 5-year paper since it joined the euro in 1999.
“The conference call will at least calm nerves ... and may provide 24 hours of reprieve. That's about it, though,” said Sean Callow, a senior currency strategist at Westpac. “There are plenty of road bumps (ahead).”
Some analysts and officials have argued that a move to common debt issuance of the sort referred to by Barroso could provide the decisive structural change which finally caps the euro zone crisis.
AUSSIE TUMBLES
The Australian dollar fell 0.8 percent to $1.0233 after a downward adjustment to second-quarter inflation added to the case against higher rates while a break of key support triggered heavy selling from macro funds.
The fall in the Aussie accelerated after it slipped below major support at $1.0247, the 61.8 percent retracement of its rally last month, and at one point it dropped to a one month low of $1.0179.
The move weighed heavily on other riskier assets, with strong selling also emerging in other Asian currencies.
The dollar index was up 0.35 percent at 77.208, with analysts saying the US currency was increasingly being seen as a safe haven.
In a measure of the alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.
Against the yen, the dollar was steady at 76.93 yen , remaining within the snug 76.40/77.85 range of the last three weeks.
Investors have been wary of a possible intervention by Japan to weaken its currency, after Switzerland took aggressive action last month in setting a ceiling for the franc. - Reuters