LONDON (Reuters) - The euro fell on Tuesday as skepticism grew that an informal meeting of European leaders would yield much progress in tackling the debt crisis, with worries about Greek politics and Spanish banking problems expected to keep the currency weak.
While there have been hopes in some quarters that measures to boost growth may be agreed at Wednesday's summit, investors were not confident of a breakthrough given apparent differences in opinion between Germany and France.
French President Francois Hollande is expected to push for a joint euro zone bond, a measure backed by Italy, Spain and the European Commission.
However Germany, Europe's largest economy and paymaster, has so far opposed the move and continues to champion austerity measures. A German official said on Tuesday euro bonds did not offer a solution to the region's problems.
"Very little is likely to come out of this summit ... The pressure remains on the downside in euro/dollar and any rebounds will be sold into in this environment," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"We have very little progress on the policy front which will leave the euro exposed."
The euro was down 0.5 percent against the dollar at $1.2752, though it held above last week's four-month low of $1.2642.
However, with speculators' short euro positions at a record high, traders were wary of any development that could trigger a squeeze higher.
"I doubt any news out of the meeting tomorrow will be able to create a positive environment, but people booked some profit at the end of last week and may be waiting for better levels to sell the euro," said Niels Christensen, FX strategist at Nordea.
Concerns also remained that Greece could leave the euro after elections next month and about Spain's troubled banking sector. The Institute of International Finance said Spanish banks could need another 76 billion euros to cover loan losses.
YEN FALLS ON FITCH MOVE
The yen lost ground against the dollar after Fitch rating agency cut Japan's long-term ratings to A+, citing Japan's high and rising public debt ratios and a "leisurely" fiscal consolidation plan.
The dollar was up 0.55 percent against the yen at 79.76 yen.
However, analysts expected falls to be limited as investors seek safety given the risks the euro zone debt crisis poses to the global economy.
"The initial market reaction has been to weaken the yen but I don't think that is sustainable. It is likely that the yen will remain strong," Morgan Stanley's Stannard said.
The OECD said on Tuesday the United States and Japan were leading a fragile economic recovery among developed countries but that this could be blown off course if the euro zone fails to contain its debt crisis.
The Bank of Japan begins a two-day policy meeting on Tuesday, with most market players expecting the BOJ to keep policy on hold after easing last month.
Some speculation in the market that the BOJ may opt for more easing could also boost the yen if it keeps policy unchanged.
That could push the dollar below 79 yen, setting it on course to test the important support level of its 200-day moving average, around 78.53 yen.
