FOREX-Euro shows muted reaction to summit, risks more selling

* Euro slips then recovers on speculation of ECB bond buying
* Tighter EZ budget rules seen unlikely to solve debt crisis soon
* Russian demand supports single currency
By Naomi Tajitsu
LONDON, Dec 9 (Reuters) - The euro showed muted reaction to an agreement by European leaders for tighter euro zone budget rules, which did little to change investors' view that there would be no quick-fire solution to the euro zone debt crisis.
The single currency initially dipped as the market digested the agreement on tigher euro zone fiscal reforms, before clawing back losses on speculation the European Central Bank was buying bonds issued by debt-stricken Italy.
The euro has been pulled in both directions, and losses in the past few weeks have been limited despite the prospect of fundamental shifts in the structure of the European Union as policymakers scramble to solve the debt crisis.
Some analysts said the euro was finding some support on Friday as many investors, including hedge funds, had closed their books for the year and were not taking on big positions in general.
Fund repatriation by euro zone investors who need to reduce their foreign assets to bolster their balance sheets has also provided support to the single currency, they added. While EU leaders agreed stricter budget rules for the euro zone early on Friday, they failed to secure changes to the union's treaty covering all 27 member states, meaning a deal will only include the euro zone's 17 members, along with any others who wish to join.
Investors were also pessimistic about plans to lend an additional 200 billion euros to the IMF to help bail out weak euro zone countries, viewing it would not be enough funding power to shield larger countries in trouble.
"The summit is still ongoing, but at the moment it's slightly negative for the euro," said Marcus Hettinger, global head of currency research at Credit Suisse in Zurich.
"The market is looking for a quick solution which is impossible ... Countries are reducing their deficits, which is negative for growth in the mid-term, and this process will take time," he said, adding this would be negative for the euro down the line.
But he said the euro's sluggish performance also reflected the loss of its interest rate advantage against other currencies, after the European Central Bank cut rates by 25 basis points to 1 percent on Thursday.
Many analysts said the single currency may encounter more selling pressure if further progress is not seen to be made at the summit, which continues on Friday.
The euro was little changed on the day at $1.3340, after hitting a low of $1.3281. It is poised to end the week nearly 1 percent lower against the dollar.
Speculation remained rife of an options-related barrier around $1.3250, which was limiting losses in the single currency. Key downside support for the euro lies at its November trough of $1.3213 and then at its October low near $1.3145.
Uncertainty about whether the euro zone will be able to weather deep debt problems has prompted investors to dump higher-risk assets, including those denominated in euros and the Australian and New Zealand dollars, for the safety of the yen and the highly liquid dollar.
ECB PESSIMISM
The euro traded at 103.66 yen, recovering from an earlier fall to 103.85 yen, while the Australian and New Zealand dollars each fell as much as 1 percent against the Japanese currency.
The Australian dollar fell 0.7 percent to US$1.0092, which supported the U.S. currency across the board. The dollar index rose 0.1 percent to 78.903.
The euro had come under pressure on Thursday after the European Central Bank poured cold water on hopes it would buy up more bonds of debt-laden euro zone states, a step some deem essential to containing the debt crisis.
ECB President Mario Draghi welcomed the fiscal pact agreed by euro zone members on Friday, but market participants remained sceptical that this would lead to a significant increase in the central bank's purchases of bonds issued by debt-laden euro zone states.
"(Draghi) he had poured so much cold water on hopes that the ECB would massively increase its purchases of government bonds, that the market reaction this morning is one of disappointment," Societe Generale analysts said in a note.