(Reuters) - The euro gave up gains on Wednesday, weighed down by comments from a senior German official who watered down some of the optimism building that European leaders will take decisive steps to contain the region's debt crisis at a summit on Friday.
Berlin is increasingly pessimistic about the chances of a deal to solve the debt crisis at the summit, because some governments do not seem to grasp the gravity of the situation, a German government official said, speaking on condition of anonymity.
The euro dipped to a session low of $1.3373, triggering reported stop-loss orders below $1.3400 and was last trading at $1.3386, down 0.1 percent on the day. Chartists said trendline support from its November 30 low comes in around $1.3345, a level that could check losses for now.
Market players said the move was exacerbated by thin end-of-year liquidity conditions, and there were supporting bids from Asian central banks around $1.3350-60.
This is a bit of an eye-opener. Markets have taken quite a gloomy reading of the comments, just when there had been some tentative optimism building, said Neil Mellor, currency strategist at Bank of New York Mellon.
Despite the slide, the single currency held above the previous session's low near $1.3334. Strategists said investors would be wary of initiating positions ahead of the EU summit and a European Central Bank rate decision on Thursday.
A key focal point of the summit is whether euro zone leaders make enough progress toward fiscal integration and more stringent budgetary discipline to open the way for the ECB to take a greater role in stabilizing euro zone bond markets.
Investors are also focusing on possible initiatives to increase the capabilities of rescue funds that could help backstop euro zone governments hit by debt market turmoil.
But the senior German official poured cold water on the idea to raise the combined lending limit of the temporary EFSF and its successor. Some analysts say that is one of the key criteria that needs to be met for the summit to be considered a success.
Before the summit, the ECB is widely expected to announce a rate cut on Thursday and, following hints from ECB President Mario Draghi last week, some market players are also starting to position for the possibility the central bank may step up its crisis-fighting measures.
The market has again and again bought into the idea of a comprehensive and convincing solution from policymakers so there is potential for some short-term upward movement in the euro today, said Ulrich Leuchtmann, head of currency research at Commerzbank. He was speaking before the German official's pessimistic comments.
Some people are also preparing for the ECB to announce something more drastic, Leuchtmann added.
The single currency showed little reaction to better-than-expected demand at a five-year German Bund auction that nevertheless soothed some concerns that investors may start shunning the euro zone's strongest economy.
Markets were rattled and the euro fell last month when Germany suffered one of its least successful debt auctions since the launch of the single currency, with investors put off by low returns.
The euro was flat against the Swiss franc at 1.2415 francs. It earlier spiked to around 1.2440 francs after the Swiss finance minister said authorities could even consider negative interest rate and capital control options to curb the franc's strength.
The single currency has gained in the past two days after a steep fall in Swiss consumer prices fanned speculation the Swiss National Bank may raise the floor in euro/Swiss.
There was talk of hedge funds buying euro/Swiss franc call options with a strike price at 1.2500 francs that are due to expire in the next week or two. In addition, traders cited talk of a large euro/Swiss franc option barrier at 1.2500 francs.
The Australian dollar rose 0.2 percent to $1.0250, supported by data showing Australia's economy grew a brisk 1.0 percent in the third quarter from the previous three months.
The dollar held steady versus the yen at 77.72 yen and was up 0.1 percent on a basket of currencies at 78.56 .DXY.