LONDON, May 22 (Reuters) – The euro steadied against the dollar on Tuesday as its rebound from a recent four-month low stalled, although traders said selling was likely to be limited in the run-up to an informal meeting of European leaders this week.
Many in the market were sceptical policymakers could agree measures to help tackle the euro zone debt crisis and soothe concerns about Greek political turmoil and weakness in the Spanish banking system.
But with speculators' short euro positions at a record high, traders were wary of the potential for a squeeze higher on any signs of progress at Wednesday's meeting.
The euro dipped 0.1 percent against the dollar to $1.2802, but holding above last week's four-month low of $1.2642.
"I doubt any news out of the meeting tomorrow will be able to create a positive environment, but people booked some profit at the end of last week and may be waiting for better levels to sell the euro," said Niels Christensen, FX strategist at Nordea.
Market players saw support for the euro around $1.2789, the 23.6 percent retracement of the May fall from $1.3283 to $1.2642, and traders reported offers from Asian central banks above $1.2825-30 that were expected to cap gains.
French President Francois Hollande is expected to push for a joint euro zone bond at the EU meeting in Brussels, a measure backed by Italy, Spain and the European Commission. However Germany, Europe's largest economy, has so far opposed the move and championed austerity measures to tackle the crisis.
"The market has been sort of supporting the German line of tough austerity. But that may be changing as well," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
Many market participants were cautious ahead of the summit, which could highlight a deep divide between the German-led drive for austerity and the efforts to put more focus on growth, a pledge of the new French president.
Although the euro struggled versus the dollar it climbed 0.2 percent against the yen to 101.84. The dollar also rose 0.3 percent against the Japanese currency to 79.51, off a three-month low of 79.002 hit on Friday.
The Bank of Japan begins a two-day policy meeting on Tuesday, with most market players expecting the BOJ to keep policy on hold after easing last month.
However, speculation the BOJ could ease further raised the possibility the yen could rise if it kept policy on hold.
That could push the dollar below 79 yen, setting it on course to test the important support level of its 200-day moving average, around 78.53 yen.
The Australian dollar rose 0.2 percent to US$0.9931 , rising clear of a six-month low of US$0.9794 hit last week thanks to broad recovery in riskier assets on Monday.