NEW YORK (Dow Jones)--The weight of Europe's debt problems hampered the euro Friday, which shed more than a cent intraday as investors became cautious ahead of a critical European Union summit next week. With speculation mounting that the International Monetary Fund may need to commit its resources to contain the euro zone's crisis, the euro rose on early reports that the European Central Bank could lend as much as $270 billion to the fund. The news helped spark a rally that was helped by news that the U.S. unemployment rate fell sharply in November.
But the common currency fell anew as doubts set in about whether even that sum would be sufficient to stem contagion from Europe. Over the last week, borrowing costs of Italy and Spain have fallen, yet hover uncomfortably near levels that economists think are unsustainable.
Meanwhile, skepticism continues to dog Europe's newly-created bailout facility, which analysts say has not attracted nearly enough capital to manage the Continent's growing debt woes by itself. Markets are looking for the ECB adopt a more aggressive stance, yet they appear reluctant to do so unless EU leaders can forge broad-based agreement on new fiscal rules at next week's high-stakes meeting.
Even if the IMF helps Europe, traders wonder "what's the ECB going to come to the party with?" asked Ray Attrill, senior currency analyst at BNP Paribas. "If Europeans deliver on a fiscal compact, then certainly the ECB will be inclined to be supportive of bond markets," he added.
Late Friday, the euro was at $1.3392 from $1.3461 late Thursday, according to EBS via CQG. The dollar was at Y77.94 from Y77.70, while the euro was at Y104.40 from Y104.61. The U.K. pound was at $1.5613 from $1.5687. The dollar was at CHF0.9219 from CHF0.9155.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 78.636 from about 78.328.
Worries about Europe overwhelmed news that the U.S. economy created 120,000 new jobs last month, with the unemployment rate sliding to 8.6% for the first time since March 2009. The focus on the euro zone's woes gave market chatter about the IMF more significance than it would have had otherwise.
A potential alliance of the IMF and ECB could face some stiff political headwinds. Traders sold the euro on news that Congressional Republicans might block U.S. funds flowing to the IMF that could be used in a euro zone rescue.
Meanwhile, the ECB's policy meeting Thursday could see the central bank lowering borrowing costs in order to spur the 17-nation currency bloc's sluggish growth. Until the debt crisis is resolved, however, analysts remain skeptical that an interest rate cut will cure what ails the Continent.
"The market is falling into this pattern of buying on various levels of optimism, then invariably selling on disappointment," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, who expects the euro to fall as low as $1.3215. "I'm still overall negative on the euro until we get something meaningful to hang our hats on, and the IMF doesn't do it for me yet."