By Anirban Nag The euro was firm against a weak dollar on Wednesday ahead of a EU summit where expectations of a solution to the debt crisis are running low, while the greenback fell to a record low against the yen keeping alive the risk of intervention by the Japanese. The dollar hit a fresh record low against the yen and slipped to a six-week low against the Swiss franc with hedge funds building bearish bets on the greenback on increasing speculation that the Federal Reserve will opt for more easing. Those expectations were supporting broad risk appetite and the euro even though optimism that leaders could take major steps in solving the euro zone debt crisis has waned in the past 24 hours. Still, analysts said the fact the euro remained within sight of a six-week high of $1.39605 hit the previous session showed some were still hoping for a positive outcome. The euro was last up 0.2 percent at $1.3940, after finding support at its overnight low of $1.3847. Traders said a Middle East sovereign was buying euros with decent sized offers placed above $1.3950 and option expiries at $1.3900 which are likely to keep the common currency in a range. "It is not just about Europe, there have been a few more supportive developments for risk-on currencies this week such as the U.S. QE story," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank. "Overall the risk is to euro downside and for some disappointment from the summit. The dominant view is that we will get something but it may not be as much as investors were hoping for two weeks ago." Investors have been expecting the EU to adopt a plan to reduce Greece's debt burden, recapitalize European banks to help absorb bond losses, and strengthen the euro zone rescue fund, the European Financial Stability Facility (EFSF), to stave off contagion in the bond market. But divisions remain over the extent of losses that private holders of Greek bonds would have to incur and the size of a planned bank recapitalization, while the scope for leveraging the bailout fund is also uncertain. Investors are not expecting any earth-shattering decisions out of the summit until late in the day. But the incoming head of the European Central Bank, Mario Draghi threw a lifeline by signaling the bank would go on buying troubled states' bonds to combat market turmoil. Colin Harte, director of currency and fixed income at Barings Asset Management, which has 28 billion pounds in assets, said whatever the outcome of the summit the single currency remained in a vulnerable position. "People are assuming European policymakers will do more or less the right thing but they seem to have a capacity to take two steps forward and 1.9 steps backwards. "After the summit the problems are still going to be there for the euro in that peripheral countries need to adjust, there are still going to have to be cuts," he said, adding that Barings has no open positions in the euro. JAPANESE INTERVENTION Fresh gloomy data out of the U.S. reinforced market expectations of more stimulus from the Federal Reserve. Two key Fed board members recently voiced the possibility of action to shore up the housing sector. The dollar hit a fresh record low against the yen of 75.709 yen, keeping alive the risk of intervention by Japanese authorities. Traders cited stop loss orders below 75.70 yen and an option barrier at 75.50 yen. Japan's central bank is likely to debate easing monetary policy further at a meeting on Thursday, sources said. "Further modest monetary easing or unilateral intervention from Japan is unlikely to derail the yen strengthening trend on a sustained basis," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi UFJ. The dollar fell against the Swiss franc, dropping to a six-week low of 0.8729 francs on EBS. The euro also fell to a three-week low against the Swiss franc of 1.2157 francs on EBS. Meanwhile, the Australian dollar was down 0.5 percent at US$1.0370 after Australia's underlying inflation data came in below expectations, increasing the chances of a rate cut. (additional reporting by Nia Williams; Editing by Anna Willard/Ruth Pitchford)

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