LONDON: The euro extended gains against the dollar on Wednesday, buoyed by expectations for higher euro zone interest rates after European Central Bank officials stressed their readiness to fight inflation.
Market players said the euro was supported by earlier buying by Asian central banks and by real money selling of dollars following a drop in US Treasury yields the previous day.
ECB officials Yves Mersch and Nout Wellink said on Tuesday the ECB was ready to fight inflation by raising rates when needed, prompting interest rate futures to price in a 25 basis point hike in August.
"People are happy to put on long euro/dollar positions on the back of the ECB comments and there is a bit of risk appetite returning after the risk aversion we had yesterday," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"There are still a lot of uncertainties in North Africa, but the impact tends to wane if there is no new news."
The euro was up 0.4 percent at $1.3710. However, some traders said the single currency could succumb to profit-taking, with offers from Asian central banks reported at $1.3740-50.
The euro and perceived higher risk currencies were also vulnerable to any worsening of tensions in North Africa and the Middle East that may cause a spike in oil prices.
The euro faces a cluster of resistance around $1.3750, with the Feb 9 peak at $1.3745 -- above which would be a three-week high -- and trendline resistance drawn from peaks hit in November 2010 and February that comes in near $1.3765.
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A clear break of the $1.3750 resistance area could open the way for further gains in the euro, with the next major resistance on charts seen at $1.3862, a three-month peak hit in early February on trading platform EBS.
"The market seems to be short (the euro) after yesterday's moves and we could see a rise toward such levels (near $1.3750) on short-covering," said a trader for a Japanese brokerage house in Tokyo.
The prospect of a rate hike in the UK also boosted sterling, which rose 0.5 percent to $1.6209 versus the dollar as investors awaited the Bank of England's February meeting minutes to see if more policymakers voted for a hike.
The ECB comments caused the euro to bounce sharply from Tuesday's low of $1.3525, when unrest in Libya caused oil prices to spike, prompting investors to cut risk exposure and lifting safe-haven flows into the dollar and Swiss franc.
Uncertainties remained, however, helping the Swiss franc to a three-week high of 0.9355 francs per dollar.
Popular protests have toppled entrenched leaders in Egypt and Tunisia, but a defiant Muammar Gaddafi said he would not be forced out by the deadly unrest sweeping Africa's third-largest oil producer.
Against a basket of currencies, the dollar was down 0.35 percent at 77.490, near an earlier three-week low of 77.411 and well below a high of 78.326 hit on Tuesday.
The dollar dipped 0.1 percent versus the yen to 82.67 yen on talk of selling by Japanese investment trusts and expectations for Japanese exporters to step up dollar selling towards month-end, though bids were reported near 82.50 yen.
The Australian dollar recovered to trade up 0.4 percent at $1.0034 but the New Zealand dollar hit a two-month low of $0.7433 after Tuesday's deadly earthquake raised concerns about the economic outlook.
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