The euro held steady against the dollar on Thursday as uncertainty gripped markets before an ECB meeting that could see rates cut or the rebirth of long-term lending to banks, while Europe's efforts to resolve its debt crisis and solid U.S. data provided tentative support for riskier assets.
The euro, last at $1.3331, maintained most of its overnight gains made after Germany said it would help its own banks if necessary and opened the possibility of using a regional bailout fund to strengthen the euro zone banking system.
Investor focus now shifts squarely to the European Central Bank's monetary policy meeting, whose outcome — due at 1145 GMT — seems increasingly uncertain.
The ECB has been widely expected to keep rates unchanged at 1.5%, but calls for a cut have grown louder amid signs the euro zone economy is deteriorating further and as Greek default fears weigh heavily on confidence in the bloc's banks.
"Inflation fears may not allow the ECB to cut rates, but we're bound to see some form of support for Europe's banking system — and that should help the euro rise," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.
Kitakura cited measures such as more liquidity, bringing back the ECB's 12-month tender last used at the end of 2009, and, possibly, the resurrection of its programme for buying covered bonds.
In a Reuters survey taken last week, 56 out of 75 economists said they expected the ECB to hold rates this time around, though 13 saw a 25 basis-point cut and 7 predicted a 50 basis-point cut.
JP Morgan Chase is forecasting a drastic 50 basis point cut by the ECB saying the bank's move to "balanced" inflation risk at the last meeting came sooner than expected especially since the "inflation hump" is far from over.
"Because the market remains split in its views on what the ECB should do, it's hard to say to what extent any move is already priced in the euro," said a trader for a Japanese bank.
He added that if there is no cut, but additional measures like more liquidity are implemented, the euro could jump to take out stop losses looming between $1.3400 and $1.3450.
A decisive break above that level could pave the way for a correction towards $1.3680 — the 38.2% retracement of the $1.4550-$1.3145 slide.
The single currency has lost about 10% against the dollar since that late August peak at $1.4550, but stands well-off a nine-month trough of $1.3145 struck this week.
WAITING FOR SOLUTION
European finance ministers agreed to safeguard banks, many of which could face heavy losses if a planned second bailout package for Greece does not go ahead, after France and Belgium agreed to bail out the debt crisis' first banking casualty, Dexia .
The countries are expecting to finalise the rescue of the troubled lender, but disagreements remain over details of the plan as the two countries try to defend their respective national interests.
"The crisis is far from over and I'm still negative on the euro looking beyond the ECB," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ, adding that the currency may eventually drift below $1.30 in the coming days.
The Netherlands votes on widening the role of the EFSF euro zone bailout fund, as agreed in July, after Malta delayed its ratification of the facility, while Slovakia — the last country to vote on the issue next week — is bitterly divided over it.
"They are voting over it, but these measures are already seen as not satisfactory and the wholistic structural solution is still far away," said Uchida.
The British pound shed 0.3% to $1.5425 as the Bank of England was due to meet on Thursday amid talk it may open the way for more quantitative easing.
The single currency hovered around 1.2318 Swiss francs , having hit its highest since May on Wednesday.
With markets highly concerned about the threat of a systemic shock in Europe, they barely took notice of another round of better-than-expected U.S. data showing the economy is still growing, albeit slowly.
The recent flow of data suggests fears of recession in the U.S. and a hard landing in China are possibly overdone. A good number from Friday's U.S. non-farm payrolls could set the stage for a rally in risk assets.
The dollar index came off a nine-month high of 79.838 earlier in the week to last trade at 79.028. It was steady against the yen at 76.74, off a three-week peak of 77.26 struck on Monday.
