The euro clung to much of the gains it made on Monday , when it rose roughly 1.3 percent, cheered by news the European Central Bank spent a record 22 billion euros on government debt last week, and signs of stabilisation in equity markets.
The single currency faces a crucial test on charts at levels just under $1.45. Trendline resistance drawn off peaks hit in early June and late July comes in roughly around $1.4470 to $1.4480.
A breach of those levels may set the euro up for more gains, but a failure to break above the resistance could bode ill for the single currency.
The next key event for the euro is Tuesday's summit between French President Nicolas Sarkozy and German Chancellor Angela Merkel. The two leaders will meet in Paris from 1400 GMT and a joint news conference is expected at 1600 GMT.
A focal point is whether there will be any signs of progress toward the issuance of joint eurobonds, although officials in Paris and Berlin have said Tuesday's talks would not address that possibility.
Market players said the euro could draw support if Sarkozy and Merkel hint at the possibility of eurobond issuance. Still, even such a plan may not be a panacea for the euro zone's sovereign debt woes.
"Some further clarification on the eurobond issue would undoubtedly be positive for the euro, but that's still about the safety net, and not the fundamental reasons behind the debt crisis," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
The euro dipped 0.2 percent to $1.4418. It had risen to a high near $1.4477 on Monday; it’s highest in nearly three weeks.
Traders cited stop-loss euro sell orders at $1.4400. There was also talk of more stop-loss offers below that level. On the upside, stop-loss euro bids were said to be lurking near $1.4500 and $1.4550.
Market players were sceptical that any major initiatives would be announced at Tuesday's summit.
"I think the whole eurobond issue is something that, even if it is being discussed, is going to take time. I think it's pretty unlikely to be announced at this meeting," said Adarsh Sinha, Asia-Pacific G10 FX strategist at Bank of America Merrill Lynch in Hong Kong.
The summit may focus on fleshing out some details regarding "economic governance", said Rob Ryan, FX strategist at BNP Paribas in Singapore.
"If Germany is going to eventually end up supporting a eurobond it will have to be in conjunction with a very strong framework to ensure effective control of other countries' fiscal spending so that its commitment does not become open-ended," Ryan said.
SWISS FRANC
The euro dipped 0.4 percent against the Swiss franc to 1.1280, giving back some of the gains it made on Monday, when it surged roughly 2.3 percent.
The Swiss franc had slid against the dollar and the euro on Monday on speculation the Swiss National Bank may soon take further action to curb gains in the currency by setting an exchange-rate target.
Such speculation gained ground after Swiss newspaper SonntagsZeitung reported on Sunday the central bank was poised to set a target at a little over 1.10 francs per euro.
The dollar fell 0.3 percent against the Swiss franc to 0.7822 franc, but remained well above a record low of 0.70676 hit last week on trading platform EBS.
The heightened speculation that the Swiss National Bank could set a target level for the Swiss franc versus the euro comes after the SNB surprised markets earlier in August by cutting its interest rate target down close to zero.
The efforts by Swiss authorities to stem the Swiss franc's rise and speculation about the potential for more action have stirred talk that the yen may end up becoming the safe haven currency of choice, if market tensions flare up again.
The dollar held steady against the yen at 76.88 yen, having dropped back to levels seen before Japan's record yen-selling intervention on Aug. 4, and hovering near a record low of 76.25 yen hit in March.
Copyright Reuters, 2010