The euro was steady on Friday but was vulnerable on the downside after European leaders sought to play down expectations of progress on the euro zone's debt crisis this weekend, with investors still keen to sell it on rallies.

Deep divisions between France and Germany over the best way to bolster the regional bailout fund's firepower sent the common currency lower against the safe-haven Japanese yen and Swiss franc.

Failure to agree on leveraging the EFSF will hurt confidence in the euro zone's ability to manage its debt crisis after nearly two years of trying to get on top of a problem that started in Greece and now threatens to engulf major economies Italy, Spain and even France.

Investors were hoping European leaders would make progress at a summit on Sunday, but France and Germany said no firm decisions will be made until a second meeting on Wednesday, increasing investors' skepticism over policymakers' ability to dig the euro zone out of its deepening crisis.

The euro was flat against the dollar at $1.3780, recovering from a session low of $1.3704, but was on track for its first weekly loss in three weeks. Still, it has held above its nine-month low hit in early October, with the common currency lifted in part by paring back of some of the extreme bearish positioning by speculators.

The euro is being driven by short-term players with longer-term investors like asset managers all holding short positions and on the sidelines, said Manuel Oliveri, currency strategist at UBS in Zurich.

There is a lot of international pressure on the euro zone leaders to come up with a solution. So if there is one, we could see the euro bounce.

Traders said there were decent offers to sell the euro around $1.3785-95 with sizeable sell orders from Asian investors above $1.3820. On the downside, the euro may find support at $1.3700, with plenty of euro bids said to be lurking at levels between $1.3700 and $1.3650.

Below those levels, further support looms at the 100-week moving average at $1.3669 briefly breached on Thursday, while $1.3650 marks two daily lows hit earlier this week with Asian sovereign bids around the level.

The euro is holding up quite well for now but I don't think there will be much tolerance for rallies. Even if we do get some positive news out of the EU summits, a move back toward $1.40 will be sold into heavily, said Jane Foley, senior currency strategist at Rabobank.


Traders said given the euro's extreme sensitivity to headlines, investors were preferring to go neutral into the weekend.

Reflecting the short-term volatility in the common currency, euro/dollar implied vols were trading around two-week highs. One-month vols was trading around 15.75 percent, up from 15.50 percent on Thursday with risk-reversals still showing downside risks for the euro.

Investors shrugged off German IFO data which showed business sentiment falling for the fourth month in a row in October, adding to fears that Europe's growth engine could be slowing.

Investors are reluctant to add to positions given the risk events in coming days. Even after those are out of the way, cyclically the euro is likely to weaken as ECB rate cuts are looming. We are bearish and expect it to drop to $1.30 by year end, said George Saravelos, G10 FX strategist, at Deutsche Bank.

Against the yen, the common currency fell 0.2 percent to 105.66 yen, while against the Swiss currency the euro was down 0.4 percent at 1.2268 francs.

The greenback was down 0.2 percent on the yen, last changing hands at 76.68, while the dollar index was down 0.2 percent on the day at 76.816.