The euro on Friday clung to gains eked out in volatile overnight trade but looked increasingly vulnerable as European leaders remained deeply divided ahead of a weekend summit on the region's debt crisis.
The euro, last at $1.3786 , has kept well off its nine-month low hit in early October, however, despite a widening in spreads on yields between safe-haven German Bunds and other European countries.
Traders said this meant investors were trying to keep positions close to neutral heading into the summit, on the off chance that the EU manages to come up with a credible plan to resolve the crisis, and added that selling pressure will likely re-emerge "the minute the summit is over".
As an example of such nervous positioning, they cited a move in the dollar and the euro, which both tumbled against the Swiss franc, with dollar/Swiss falling 1% at one point on stop-loss buying of the franc and its purchases made by a U.S. name .
"A significant divide remains (between) German and French politicians on the key issues of bondholder hair cuts, bank recapitalisation and particularly the structure of any EFSF expansion," said Simon Smollett, analyst at Credit Agricole.
The two biggest economies in the euro zone said in a statement that European leaders would discuss a solution to the crisis on Sunday, but no decisions would be taken before a second meeting to be held by Wednesday at the latest.
"Given the inherent risks around this weekend's announcement, we view the pair's recent rally to 1.3914 as forming a short-term turning point and target a fall back to 1.3400 next week," said Smollett.
The euro may find support at $1.3700, with plenty of euro bids said to be lurking at levels between $1.3700 and $1.3650.
Below those levels, further support looms at the 100-week moving average at $1.3669 briefly breached on Thursday, $1.3650 at two daily lows hit earlier this week with Asian sovereign demand detected around the level, then $1.3621 — a 38.2% retracement of the euro's October rally, and eventually the spike low on September 12 of $1.3495.
POSITIONS SQUARE
"It looked as if the euro was going to get hammered late in Asia yesterday and many people went short. Then, when it jumped on headlines they all got squeezed only to rush to sell when sentiment turned sour again," said a senior spot trader for a major Japanese bank.
The trader added that with such volatility and the euro's extreme sensitivity to headlines, orders from clients are executed very quickly as no one wants to get caught with a large position, and that the market was mostly neutral heading into the weekend.
"The euro could fall to around $1.30 by the beginning of December. A selloff is just a matter of time and everyone is trying not to get left out when it starts," he said.
Other traders, however, speculated that after the EU's crisis scheme comes out following the second meeting due by Wednesday, the knee-jerk reaction may be higher, and only once that is over will the euro edge back down in late November or early December.
Resistance on hourly charts lies roughly around $1.3840, a downward trendline drawn off Monday's one-month peak near $1.3914 and Wednesday's intraday high of $1.3870.
Markets are also bracing for fresh data from Germany, which could fuel recession concerns for Europe's biggest economy. Due at 0800 GMT, the influential Ifo business climate is expected to fall in October for the fourth month in a row.
That was likely to add to the pressure on the euro, especially after Standard & Poor's said it will likely lower credit ratings of five European nations, including France, by one or two notches if the region plummets into recession and government borrowings increase.
Against the yen, the common currency climbed to 105.86 yen from a low of 104.83. The dollar index dipped to 76.889 from 77.498.
The greenback stood steady on the yen, last changing hands at 76.77.
Stop loss buying pushed the dollar as low as around 0.8849 Swiss francs on trading platform EBS. After trimming some losses the dollar was down 0.6% at 0.8891.
The euro slid 0.5% versus the Swiss franc to 1.2270 . The drop in dollar/Swiss and euro/Swiss seemed to gain momentum after they dropped below the previous day's intraday lows.
One trader also attributed the move to short-term speculators, who may have liquidated long positions in euro/Swiss in the wake of a sharp drop the previous day, when the pair slid 0.8%, the biggest one-day drop since early September.
