Euro rallied to $1.3853 against the US dollar after The Guardian newspaper suggested that France and Germany agreed to create a leveraged EFSF worth €2 trillion, although the euro later pared some of its gains after a senior eurozone official denied the report, saying it was ‘totally wrong’.

The euro remained resilient, however, despite Moody’s decision to downgrade Spain’s credit rating by two notches to A1, with a negative outlook. The move takes it one notch below S&P and Fitch, which have an AA- rating on the country. Moody’s said that Spain’s large borrowing needs and highly indebted banks leave the country vulnerable to market stress and event risk. The euro was little changed by Moody’s downgrade, however, on hopes that some sort of solution will be reached at the EU summit this weekend. France yesterday warned that EU leaders need to take bold measures to tackle the eurozone crisis at this weekend’s summit, otherwise the region’s unity would be at risk.

French president Nicolas Sarkozy said ‘an unprecedented financial crisis will lead us to take important, very important decisions in the coming days’. His comments contrast with those of German chancellor Angela Merkel, who played down the chances of a definitive breakthrough saying that it will mark an ‘important step’, although it will not be the final one in resolving the debt crisis. ‘These sovereign debts have built up over decades, so they won’t be ended with one summit,’ Councillor Merkel said yesterday.