The euro fell versus the dollar on Monday, coming off a six-week high as uncertainty over whether euro zone leaders would agree a comprehensive plan to tackle the debt crisis this week prompted investors to take profit on its earlier rally.
The euro had gained in early European trade after the EU neared an agreement over the weekend on bank recapitalization and euro zone officials said France and Germany were close to agreement on how to use the European Financial Stability Facility (EFSF) to stave off bond market contagion.
However, serious divisions still linger over the size of the haircut private holders of Greek bonds will have to accept, with a final decision delayed until a second summit on Wednesday.
Meanwhile, the dollar fell against the yen, trading close to a record low hit on and leaving traders on alert for possible renewed currency intervention to stem strength in the Japanese currency.
The euro rose as high as $1.3955 against the dollar, but traders said it lacked the momentum for further gains toward $1.40, prompting short-term traders to take profit on long euro positions taken out during the early rally. It was last down 0.3 percent at $1.3848.
I wouldn't go long on the euro right now. Event risk is still to the downside for the euro because the market is already priced for EU leaders to come up with a fairly big plan, said Richard Falkenhall, currency strategist at SEB in Stockholm.
He added, however, that the euro could easily rise to around $1.41 on a positive summit outcome as it would prompt speculators to further cut back on short euro positions.
The latest IMM data showed speculators increased short euro positions in the week ended October 18 on skepticism over the ability of EU leaders to resolve the region's crisis. This means any moves higher may be exaggerated as market players take profit on those positions.
The euro stood well above its nine-month low plumbed earlier this month at $1.3145 and analysts said it was likely to stay supported at least until Wednesday's summit concludes.
Traders cited bids between $1.3780 and $1.3810 which they said may cap falls, while the euro has support at the 100-week moving average around $1.3658.
However, resistance stands at the 200-week moving average near the pivotal $1.4000 level.
There are expectations for progress in the euro zone over the next few days but there's also plenty of room for disappointment so people are taking profits in the euro where they can, said Kathleen Brooks, head of research strategy at FOREX.com.
She also highlighted Monday's euro zone purchasing manager surveys weighing on the euro. Economists said the unexpected weakness of this data suggested the debt crisis may already have pushed the region into recession.
Against the yen, the dollar was down 0.2 percent at 76.07 yen, not far above Friday's all-time low of 75.78 yen.
Japanese Finance Minister Jun Azumi said on Monday that Japan would take decisive action on excessive and speculative forex moves. He said that the greenback below 76 yen did not reflect economic fundamentals.
Earlier strength in the euro helped to pushed the dollar index to its lowest in six weeks at 76.053 before steadying at 76.449.
Comments on Friday from Federal Reserve vice chair Janet Yellen that the Fed is looking at ways to offer more monetary stimulus, added to downside pressure.
The growth-linked Australian dollar was up 0.1 percent at $1.0378, though it was off an earlier six-week high of $1.0425.