(Reuters) - The euro rose against the dollar in a rebound from recent losses on Friday but stayed on track for its worst weekly performance in more than a month, with the threat of euro zone sovereign downgrades keeping investors wary of buying the common currency.
The single currency has fallen around 2.3 percent on the week, its worst performance since the week ended November 6, as last week's European Union summit failed to provide assurance to investors in euro zone bonds.
A report showing U.S. consumer prices were flat in November as Americans paid less for cars and gasoline had fleeting impact on trading.
"Overnight, we saw a little bit of a rebound in the euro, basically some profit-taking and positioning ahead of the weekend," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "But ultimately I think the story is a negative one for the euro and that will continue to play itself out over the week ahead."
The euro rose 0.4 percent to $1.3067, with traders reporting thin end-of-year liquidity. It held above the $1.30 level and hovered close to a session high of $1.3084, reached on light short-covering prompted after Thursday's well-bid Spanish auction on Thursday and solid U.S. economic data.
Analysts said a threat of downgrades from rating agency Standard & Poor's, which put a raft of euro zone countries on review ahead of the summit, continued to hang over governments including Germany and France.
Rumors of such an event have been circulating since last week, although Italian and Spanish bond spreads over Bunds were tighter on Friday.
Some traders said the euro could bounce 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.
"There remains a great deal of concern about the direction of the euro zone," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "We're still not trading on fundamentals and haven't been for some time."
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 EU states may develop cold feet over proposals on a tighter fiscal regime that were the centerpiece of the summit.
Uncertainty over the outcome of Greek debt swap negotiations and signs some national central banks, including Germany's, are reluctant to boost lending to the IMF added to the view the crisis may intensify in the New Year.
"The first quarter is looking extremely worrying, Greece is looking worse than anticipated and Ireland will potentially need a referendum (on EU treaty changes)," said Derek Halpenny, head of global currency research at Bank of Tokyo-Mitsubishi in London.
"The euro zone could be unravelling and as long as that option remains in the market, the risk of pronounced moves and significant uncertainty remains extremely high."
There was some relief, however, as Italian Prime Minister Mario Monti's government won a parliamentary confidence vote on its austerity package.
IMPLIED VOLS SLUMP
In the options market, one-month euro/dollar implied volatilities hit a 3-1/2-month low around 12.10, coming further off the 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 euro zone debt crisis.
The euro was steady versus the Swiss franc at 1.2236 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.
Commodity currencies were higher with the Australian dollar up 0.9 percent at $0.9994. The New Zealand dollar was also well bid, adding 1.4 percent to $0.7628.
