The euro steadied on Wednesday as a pledge by policymakers to strengthen the European banking sector eased selling pressure, but it remained burdened by a lack of concrete details to deal with the region's debt crisis and worries over a Greek default.
A rise in European shares kept the single currency away from a nine-month trough hit on Tuesday against the dollar, with sentiment toward the euro zone also helped by the IMF hinting it could invest in Spanish and Italian debt alongside the EFSF bailout fund.
European Economic and Monetary Affairs Commissioner Olli Rehn told the FT on Tuesday there was a shared view that European banks' capital positions must be reinforced, but investors remain skeptical of ministers' will to act commensurately to the risks emerging.
A downgrade of Italian sovereign debt by ratings agency Moody's highlighted the funding difficulties facing the euro zone's third biggest economy, while France and Belgium were forced to help Dexia SA in the first state rescue of a European bank in the crisis.
Analysts said the single currency could fall further if investors sense European policymakers are dragging their feet on plans to leverage the EFSF.
You really need a credible bank recapitalization plan, expansion of EFSF firepower and structural reform in Italy to ease pressure on the euro, said Kiran Kowshik, currency strategist at BNP Paribas.
Any sign that Germany, which is taking the brunt of bailing out weak countries, was becoming more resistant to working toward a lasting, coordinated solution to the debt crisis would also hurt the euro.
There's just news of discussions about a possible bank recapitalizations, there's no details yet, said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.
There's a high risk of a further sell-off if we don't get details on this soon.
The euro was flat on the day at $1.3352, recovering from a session low of $1.3260. It stayed in a range of $1.3145 hit on Tuesday, its weakest since January.
Traders said buying from hedge funds had helped to lift the euro in late European morning trade as stop-losses were hit through $1.3360 en-route to a session high of $1.3375.
They said the euro may bounce around its current range as investors were wary of placing big bets in either direction given uncertainty surrounding a policy announcement from the European Central Bank on Thursday.
Some analysts said a brief corrective rally in the euro to around $1.34 could not be ruled out after the currency bounced on Tuesday from levels which, had they been breached, would have signaled an acceleration of its decline.
Key support is seen at $1.3140 -- a 76.4 percent retracement of a rise from its August 2010 low of $1.2583 to this year's high above $1.49.
Many in the market speculate it faces downward pressure if the ECB on Thursday opens the door to more monetary easing to support the economy during the debt turmoil.
While there could be some initial EUR rebound if the ECB leaves rates unchanged Thursday, gains are expected to be short-lived, Morgan Stanley analysts said in a note.
Even if the ECB does not cut this week, (ECB President) Trichet is likely to step up the dovish rhetoric, clearing the way for action in November.
U.S. non-farm payrolls due on Friday provide another risk event for investors, as signs the job sector is continuing to suffer may raise the argument for more U.S. monetary easing to boost the economy.
Federal Reserve President Ben Bernanke on Tuesday said the economy was close to faltering, and that the central bank was prepared to take further steps to help.
Weak readings of Challenger layoffs and ADP employment on Wednesday, however, may boost the dollar if investors dump more risky assets on the view the global economy continues to suffer.