FOREX-Euro near 3-week low as EU summit seen underwhelming
* Euro above 3-week low as market braces for EU summit
* Euro helped by growing speculation of ECB action
* U.S. data helps risk assets, Aussie at 1-week high vs USD
* Month-end Japan exporters' selling sends dollar/yen lower
By Hideyuki Sano
TOKYO, June 28 (Reuters) - The euro hovered near a three-week low against the U.S. dollar on Thursday as market players expected European leaders to struggle to agree on bold steps to solve the region's debt crisis at their summit starting later in the day.
But selling was limited by caution that there could be a surprise breakthrough, and by speculation that the European Central Bank could step in to ease the strains in the euro zone bond and banking system as early as next week.
The single currency bought $1.2488, versus $1.2466 late in New York, but was still within reach of this week's low of $1.24413. It remained off a high of $1.2748 set early last week.
Market players' expectations for the two-day European Union summit are already low, as EU leaders look more openly divided than at any time since the debt crisis erupted in Greece in 2010 and spread over the euro zone.
German Chancellor Angela Merkel on Wednesday brushed aside increasingly shrill calls from Spain and Italy for emergency action to lower their soaring borrowing costs and poured cold water on the idea of joint euro zone debt.
"The summit will probably just show that the debt crisis needs a lot of time to be resolved. I don't think it's time to buy the euro," said Katsunori Kitakura, associate general manager of the market-making unit at Sumitomo Mitsui Trust Bank.
Still, the euro has some support around $1.2440 and in one sign that market players have curbed their extreme pessimism on the euro, the costs of buying euro/dollar put options have dropped to the cheapest level in about two months.
The euro/dollar's risk reversal spread eased to around 1.3 percent in favour of euro/dollar puts, compared with a high of around 2.6 percent just over a month ago.
"In a way, the market is already expecting disappointment from the summit. But I do think the euro will be supported by expectations that the European Central Bank will take some measures next week," said a currency trader at a Japanese bank.
ECB TO THE RESCUE?
With concrete steps for further integration of the currency bloc seen unlikely while Spanish and Italian debt yields remain at unsustainably high levels, some market players are betting the ECB will either cut rates or announce massive long-term fund injections after its policy meeting next week.
Helping to fan such speculation, German inflation eased to an 18-month low, government data showed on Wednesday, which market players think could help nudge traditionally hawkish ECB policymakers towards easing.
Italy's borrowing costs are likely to rise above 6 percent at an auction of up to 5.5 billion euro bonds planned later in the day, just hours before the start of the summit.
On the other hand, U.S. economic data offered a rare positive surprise on Wednesday, with durable goods orders and pending home sales both beating market expectations, helping to boost risk sentiment in broad financial markets.
That helped to lift the Australian dollar by around 0.3 percent on Thursday to a one-week high of $1.0121, though strong resistance is seen around $1.0130, a level representing the 61.8 percent retracement of its recent decline.
The Aussie hit a four-month high against the euro, which fell as low as A$1.2331.
The U.S. dollar fell 0.4 percent against the yen to around 79.40 yen largely due to month-end selling by Japanese exporters, but it stayed within its trading range of the past few days.
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