The euro nudged higher during a quiet European trading session Friday as currency traders awaited the outcome of political euro-zone meetings in Rome and Luxembourg and remained cautious ahead of next week's summit of European Union leaders.
The common currency initially extended the sharp fall seen in U.S. hours as dealers in Europe digested the downgrade overnight of 15 major financial companies by ratings firm Moody's Investors Service. The euro fell to as low as $1.2519 against the dollar while European equities opened weaker, led lower by banking stocks.
But mixed German economic data then helped the euro back up to the $1.2550 level. Although the closely watched German Ifo survey of business confidence hit a two-year low in June, the decline wasn't as severe as the drop in May and this was sufficient to put a floor under the euro and support market sentiment more generally.
The common currency was nonetheless unable to build on its gains as some investors stayed on the sidelines before the weekend and awaited news from a meeting being held in Rome with the leaders of France, Germany, Spain and Italy, with a news conference scheduled for 2 p.m. GMT.
"[Angela] Merkel, [François] Hollande, [Mario] Monti and [Mariano] Rajoy are expected to put some flesh on the bones of the plans for progress toward a fiscal/banking union, and Rajoy is expected to make a formal request for aid," said Adam Cole, chief currency strategist at RBC Capital Markets in London.
But with so much still uncertain, traders remained cautious. "The market is holding its breath, hoping that there will be something to take the froth out of peripheral [euro-zone] bond yields," said Jane Foley, senior currency strategist at Rabobank in London.
Spanish and Italian benchmark borrowing costs have eased off recent highs but are still at elevated levels, with 10-year Spanish bond yields around 6.7% and Italian yields at about 5.8%.
"I would not imagine that investors would want to stray too far away from their [positive] dollar positions," Jane Foley, senior currency strategist at Rabobank in London, reflecting an underlying unease in the market about the state of both governments' finances.
Next week's summit of European leaders preyed on traders' minds, amid hopes of an imminent resolution of the euro-zone debt crisis. But currency strategists at Commerzbank said they were skeptical, expecting any decisions taken at the summit to disappoint and for disenchantment to take hold once again.
Midday in Europe, the euro was trading at $1.2559 against the dollar, compared with $1.2540 late Thursday in New York. The dollar was at ¥80.33 against the yen, compared with ¥80.27, while the euro was at ¥100.88, compared with ¥100.68. Meanwhile, the pound was trading at $1.5614 against the dollar, compared with $1.5592 late Thursday in New York.
The ICE Dollar Index, which tracks the greenback against a basket of currencies, was at 82.252 compared with 82.364 late Thursday in New York.
