The euro slid from a six-week high against the dollar today as uncertainty on euro zone agreement on a comprehensive plan to tackle the region's debt crisis prompted investors to reduce bullish bets.
The euro had gained in early trade after European leaders neared a deal over the weekend on bank recapitalisation, 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.
Serious divisions still linger, however, 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.
"There was anticipation of something more (from the euro zone meeting), and certainly there is a wee bit of disappointment," said Dean Popplewell, chief FX strategist at OANDA in Toronto.
The euro was last down 0.2 per cent at $1.3864. Traders said it lacked the momentum for gains towards $1.40, prompting short-term traders to reduce long euro positions.
Any delay in releasing a convincing plan from Wednesday's summit, or even a delay in a statement from leaders of the euro zone economies, could cause the euro to fall, analysts said.
World stocks edged up today as investors took comfort from signs that China's economy may not be in as much danger as feared.
China's flash purchasing managers' index expanded moderately in October after three months of contraction, suggesting that manufacturing in the world's second-largest economy.
This will have eased fears that China's economy is heading for a hard landing, one of the major concerns for global investors along with the euro zone crisis and the slowdown in the United States.
MSCI's all-country world stock index was up half a per cent, off its session highs, with emerging market shares climbing 2.2 per cent.
The pan-European FTSEurofirst 300 gained 0.2 per cent. Earlier, Japan's Nikkei added 1.9 per cent. The euro was volatile, at one point hitting a six-week high of $1.3955 versus the dollar, but later slipping. It was at around $1.3840. This compares with a nine-month low plumbed earlier this month at $1.3145 and traders said it was likely to keep its positive tone at least until the next summit.
The strong Japanese yen, meanwhile, is causing some concern for Japanese officials. Finance minister Jun Azumi said on Monday that Japan will take decisive action on excessive and speculative forex moves. He said that the dollar below 76 yen did not reflect economic fundamentals.
Core German government bond prices rose, with investors concerned about a lack of agreement on Greek debt writedowns.
Private sector participants seemed to be willing to take a 40 per cent loss on their Greek debt holdings, while euro zone leaders wanted a 50 to 60 per cent loss.
At the same time analysts broadly view the 40 per cent figure that the private sector is proposing as insufficient to bring Greece's debt levels back towards sustainable levels.
"They are just patching up (the Greek debt problems) but the underlying problems are huge," one trader said.
