LONDON The euro traded near a two-month low on Thursday despite approval of a key austerity package by Greece, though activity was light before a key European Central Bank policy decision.
The ECB is widely expected to leave interest rates on hold at its meeting later on Thursday but comments by President Mario Draghi on the weak outlook and gloomy forecasts from the European Commission have raised speculation it may signal more willingness to ease in future.
"If you wander around the trading floors they are flirting with the idea we may get a cut from the ECB today," said Daragh Maher, director of FX strategy at HSBC.
The single currency was steady at around $1.2765, not far from Wednesday's two-month low of $1.2736, with the dollar firmer due to concerns about the fiscal problems facing the United States after President Barack Obama's re-election.
Investors are increasingly worried that the effective return of the status quo in Washington after the election means it may be hard to reach a deal over some $600 billion in spending cuts and tax increases due to kick in early next year, which could derail the U.S economic recovery.
The dollar was up 0.1 percent to hover near a two-month high against a basket of major currencies .DXY of 80.924 hit on Wednesday, benefiting from the U.S. currency's safe-haven appeal.
The worries over the so called 'fiscal cliff' sparked a selloff on Wall Street on Wednesday and subsequently in Asian markets leaving the MSCI world equity index down 0.2 percent at 326.13 points.
The FTSEurofirst 300 index recovered slightly to be up by 0.5 percent at 1,104.35 points, after a 1.4 percent loss during the previous session. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX all opened between 0.25 and 0.5 percent higher.
U.S. stock futures were also higher, up 0.4 percent, pointing to a recovery when Wall Street opens.
In the fixed income market the approaching ECB meeting was keeping most prices little changed, with traders also focused on a Spanish debt auction of 3.5 to 4.5 billion euros of bonds including a new 5-year bond and 20-year debt - the longest dated issue to be sold at an auction since mid-2011.
Commodities markets meanwhile were looking for hints of future policy direction that may affect demand from the Chinese congress, which began on Thursday. The Chinese government has begun a once-in-a-decade leadership change against a backdrop of growing social unrest and public anger at corruption and a gap between rich and poor.
"So far, contents of speeches from the 18th Party Congress have been within expectations. There hasn't been anything particularly encouraging to investors," said Orient Futures derivatives director Andy Du.
Oil rebounded after tumbling more than $4 on Wednesday amid concerns about weak demand for fuel as the U.S. and European economies face the risk of a prolonged slowdown.
U.S. crude rose 43 cents to $84.87 a barrel, after settling at its lowest level since July at $84.44, while Brent added 25 cents to $107.07 a barrel.
(Reporting by Richard Hubbard; Editing by Peter Graff)