* Speculation grows Greece may receive aid soon
* Fitch cuts Greece 2 notches, says outlook negative
* EU officials reach deal on Greek loan terms - source
* Canadian dollar slips after jobs data (Recasts, updates prices, adds detail, comment, changes byline)
By Steven C. Johnson
NEW YORK, April 9 (Reuters) - The euro rose on Friday after an EU source said euro zone leaders had reached a deal on terms of a possible emergency loan to help Greece manage a worsening debt crisis.
That allowed traders to shrug off Fitch ratings agency's decision to downgrade Greece's credit rating by two notches to one grade above junk status.
Fitch cited Athens' fiscal challenges and uncertainty about how a European Union-International Monetary Fund aid program agreed last month would be applied.
Hopes that an agreement on loan terms would bring more clarity sparked a strong euro rally that lifted the currency to just shy of $1.35, its highest since Monday. But traders said the longer-term outlook for the euro remained negative.
"The Europeans are cognizant of the fact that they can't ignore Greece, that it's not an itch that will go away if you don't scratch it," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto.
"But the reality is that any solution is probably a poor one, and by inviting the IMF to the party, one has to wonder what the purpose of the European Union is," he added. "So I think any rally in he euro is probably short-lived."
The euro was last up 0.9 percent at $1.3472, near its session high and well off a $1.3341 session trough. It also rose 0.6 percent to 125.51 yen while the dollar slipped 0.2 percent to 93.17 yen.
Sterling rose to a six-week high near $1.54 and was last up 0.7 percent to $1.5372 and at a seven-week peak at 87.75 pence per euro. The Canadian dollar dipped to C$1.0060 per U.S. dollar after data showed Canada's economy added fewer jobs than economists had expected in March.
Investors continued to watch for any signs that China was moving to revalue the yuan. The New York Times reported this week that the government was close to announcing a shift in currency policy.
EURO FACES UPHILL CLIMB
The euro is still down almost 6 percent versus the dollar so far this year and earlier this week it fell below $1.33, near its lowest level in 2010.
"The market had gotten quite negative on the euro and what we're seeing is a bit of a squeeze of some of those euro shorts," said Aroop Chatterjee, currency strategist at Barclays Capital in New York.
But he said lack of clarity on a Greek bailout and weak euro zone economic data will continue to hurt the currency.
For now, BMO's Askari said "the euro could snap back to $1.37 in a heartbeat, just based on positioning. But in the longer term, I just don't want to be long the euro."
Investors in recent months have steadily sold Greek assets, a trend that began when the country revealed last year that its 2009 budget deficit was twice as high as markets thought.
That has driven up Greece's borrowing costs and raised doubts about whether the euro zone country can remain solvent.
European Central Bank President Jean-Claude Trichet took some pressure off the currency on Thursday when he said a Greek default was unlikely. He reiterated that view Friday. (Additional reporting by Wanfeng Zhou; Editing by James Dalgleish)