TOKYO: The euro inched higher on Wednesday after hitting a two-week low the previous day, but gains were halted by scepticism that a European summit would deliver concrete measures to ease the region's debt crisis.
A quick move toward the issuance of common euro-zone bonds was highly unlikely after German Chancellor Angela Merkel was quoted as saying Europe would not share total debt liability “as long as I live.”
The European Union summit on Thursday and Friday is unlikely to alter the single currency's downtrend, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.
“The euro could see a break below $1.20 by year-end. I'm focusing more on just how far it might go if it drops below $1.20,” he added.
The euro edged up 0.1 per cent to $1.2503 and stayed above Tuesday's trough of $1.24413 on trading platform EBS, which was the euro's lowest level since June 8.
The next major downside target is a two-year low of $1.2288 hit on June 1.
“Since short positions have piled up, the euro could rise sharply at some point, but you have to be careful not to be fooled by such a move,” Mizuho Corporate Bank's Karakama said.
In addition to Merkel's comments, the euro had come under pressure the previous day after Spanish bond yields rose as demand at a bill sale fell despite the significantly higher returns on offer to investors.
Against the yen, the euro held steady at 99.36 yen, having hit a two-week low of 98.74 yen on Tuesday.
The dollar dipped 0.1 per cent to 79.47 yen, well below a two-month high of 80.63 yen hit earlier this week.
The yen held its ground although some market players say political uncertainty because of a rift inside Japan's ruling party may weigh on the currency.
Gareth Berry, associate director of G10 FX strategy for UBS in Singapore, said investors outside of Japan so far seemed unsure about how Japanese politics might affect the yen.
“International investors have been burned so many times by trying to trade dollar/yen around Japanese political events,” Berry said.
“They are happy to watch the story unfold but unwilling to take positions, in FX at least,” he added.
Japanese Prime Minister Yoshihiko Noda faces the risk of a split in his party that could trigger a snap election after his signature tax-increase plan cleared parliament's lower house on Tuesday despite its rejection by a group of party rebels.
The plan to double the sales tax to 10 per cent over three years is seen as a first step towards curbing Japan's snowballing public debt, which already exceeds two years' worth of its economic output.
Neither Japanese politics nor the passage of the tax increase through the lower house of parliament are likely to be major drivers of the yen's moves, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
“The European situation and issues related to investors' risk tolerance are far bigger factors,” Okagawa said.