Dollar holds onto gains

The dollar held near recent 9-month highs versus the euro on Thursday as European Union leaders gathered to broker a budget deal and salvage the EU constitution after rejection by French and Dutch voters. Weaker-than-expected US capital flows and inflation data this week have slowed the ascent of the dollar - which is still up 10 percent against the euro this year, boosted by expectations that US interest rates would rise further.
In contrast, bleak growth prospects in the euro zone have led investors and policymakers to push the European Central Bank (ECB) to cut interest rates.
"On the back of softer US numbers, the dollar looks a bit vulnerable. But the news from the EU continues to be negative and there is downside risk and pressure on the euro," said Mitul Kotecha, head of global foreign exchange research at Calyon.
By 1140 GMT, the euro was holding steady at $1.2119, having fallen to $1.2014 on Wednesday, its weakest since August. Traders said option-related buying around $1.20 is supporting the euro for the moment. Against the yen the dollar was trading at 109.13, having hit an 8-month high of 109.71 in the previous session.
EU leaders are aiming to hammer out a deal for the 2007-2013 budget and find ways to resurrect the constitution.
European Commission President Jose Manuel Barroso said that a failure to resolve the budget problem and move forward with the constitution would push Europe into "permanent crisis and paralysis".
Dutch European Affairs Minister Atzo Nicolai said there was no chance of a second referendum on the EU constitution in the Netherlands.
The risk premium on European assets has crept up in recent weeks as investors have interpreted the constitution vote as a blow to the euro and started pricing in a small risk to the political future of the bloc.
"A summit failure would not come as a surprise but negative reaction cannot be ruled out as it would raise questions about economic and monetary integration," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt.
As the ECB holds its ground on rates, a weaker euro has brought relief to euro zone policymakers as it helps to keep European exports competitive in global markets.
European policymakers have been welcoming the euro's recent fall, with Germany's finance ministry saying it would be beneficial for the country's exporters.
At the current level of $1.2101, the euro is still seen strong by most European policymakers and often blamed by some as a factor dampening exports and growth.
The euro was launched in 1999 at around $1.17 and dropped in 2000 to as low as $0.82.