European Union leaders are scheduled to meet at the end of next week, with Spain expected to be a focus of discussion. Euro zone finance ministers delivered a united defense of Spain at a meeting this week, saying the country did not need a bailout, at least for now.
The euro rose 0.1 percent to $1.2898, erasing losses that had taken it to a session low of $1.2833 on Reuters data, the weakest level since October 1.
A Spanish bailout deal is seen by most traders as positive for the euro because it would activate the European Central Bank's bond-buying program aimed at reducing borrowing costs for debt-ridden countries.
The euro has rallied 7 percent since hitting a two-year low of $1.2040 in late July after ECB head Mario Draghi pledged to do whatever it takes to preserve the euro.
"The market had factored in that the ECB had gone to all these lengths to resurrect the bond-buying plan with Spain in mind, and Spain just hasn't taken the bait as yet," Standard Bank's head of G10 currency research Steve Barrow said.
"The problem now is that maybe their chance has been missed, and instead perhaps Spain will now not do anything until yields start to move up."
Traders said the euro is likely to trade in a range in the near term, with good support from its 200-day moving average around $1.2820, followed by the October 1 low of $1.2802. A break below that would leave it vulnerable to more falls.
"The euro fell towards the 200-day simple moving average and we saw it rebound ahead of that level," said Eric Viloria, senior currency strategist at Forex.com in New York. "We are expecting the euro to continue to consolidate between there and $1.31 until we can get any major new catalysts."
Investors are also fretting about whether Greece will agree terms with its "troika" of international lenders - the European Union, European Central Bank and International Monetary Fund - for the next tranche of funds needed to keep the country afloat.
Without the 31.5-billion-euro tranche, Greece says it will run out of money by the end of November.
German newspapers attacked "ungrateful" Greeks for the hostile public reception they gave Chancellor Angela Merkel in Athens and some criticized Merkel's generosity for promising that Greece would stay in the euro zone.
While Merkel reaffirmed her commitment to keeping Greece in the euro, she offered Prime Minister Antonis Samaras no concrete relief ahead of a report next month by the "troika" of international creditors on Greece's progress on savings targets.
"They haven't met many, or most of their goals, and are not likely in the next couple of months, so it really depends on the willingness of the troika to keep paying for Greece," said Tatjana Michel, director of currency analysis at Charles Schwab in San Francisco.
But she said comments by European politicians and Greek leaders suggested both sides want Greece to stay in the euro, so "I can imagine that they will find ways to somehow finance Greece."
Unease over Spain's future, which has pushed investors back to less risky debt despite the low yields on offer, was reflected in strong demand in a 3.1 billion euro sale of five-year German bonds, which are seen as a safe-haven investment, on Wednesday.
Draghi said the region faced a long road to recovery, despite the ECB's plan to buy the bonds of indebted euro zone countries, and that there was no alternative to budget austerity.
The currency market showed little reaction to the Federal Reserve's Beige Book report, which said economic activity is expanding modestly in most regions though pockets of weakness and strained labor markets remain a problem for some districts.
Against the yen, the euro was flat at 100.80 yen, while the dollar fell 0.1 percent to 78.17 yen. The dollar index .DXY slipped 0.1 percent to 79.917, having earlier hit 80.186, its strongest since September 11.
The Australian dollar rose after a successful sale of Australian long-dated bonds boosted demand. It was last up 0.3 percent against the U.S. dollar at $1.0226.
(Editing by Leslie Adler)
http://www.reuters.com/article/2012/10/10/us-markets-forex-idUSBRE8990LW20121010
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