NEW YORK: The euro rose against the dollar for the first time in three sessions on Tuesday, buoyed by hopes of bond-buying by the European Central Bank to contain the debt crisis and expectations of further easing by the Federal Reserve.
Investors awaited key events in the coming days and weeks, including a speech by Fed Chairman Ben Bernanke on Friday, a policy meeting by the ECB on Sept. 6 and the German Constitutional Court's ruling on the euro zone's permanent bailout fund on Sept. 12.
Bernanke is speaking at a conference in Jackson Hole, Wyoming, and is expected to sustain expectations for a third round of quantitative easing (QE), though he could keep markets guessing about the timing of such an action. Further stimulus through QE bodes ill for the dollar as it is tantamount to printing money.
"Keep in mind that the third-quarter rebound is not as robust as some had hoped so far and that there is a lot of data that will come out before the September (Fed) meeting," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
"If he does confirm or make comments that are consistent with further monetary easing, then that would be viewed as negative for the dollar and positive for risk."
The euro rose 0.6 percent to $1.2570, having hit a session peak of $1.2576, not far from a seven-week high of $1.2589 set last Thursday, according to Reuters data.
Traders said liquidity was thin and that the euro's gains were helped by a large US investment bank buying a one-month euro/dollar option with a strike price at $1.2675, suggesting the euro could rise to those levels in coming weeks.
"There's a very large euro call (option) that has been the catalyst for the rise but I think we will play the ranges this week," said Richard Wiltshire, chief FX broker at ETX Capital.
"Everyone will sit on their hands until we get some kind of interest from Jackson Hole. Negative news from the euro zone seems to have abated a little bit."
ECB HOPE
The euro also drew strength from news Tuesday that ECB President Mario Draghi canceled his appearance at the Jackson Hole meeting this week, citing a heavy workload, as he gears up for a critical policymaking meeting next week.
"The interpretation being instead that he will be busy finalizing the details of policy proposals to be unveiled in the coming weeks," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.
The dollar fell 0.3 percent to 78.49 yen, with the pair stuck in a tight range between 78.77 and 78.44 yen.
The commodity-linked Australian dollar hit an almost five-week low on worries of a slowing Chinese economy.
The dollar has come under pressure against most major currencies, including the euro, since minutes last week of the US central bank's latest policy meeting suggested the Fed could launch another round of stimulus fairly soon.
Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, warned of the risk of disappointment.
"Given that market expectations remain so elevated, the risk of disappointment remains high. Lack of Fed QE3 or a watered-down plan from the ECB would leave the euro vulnerable," he said.
Market players also trimmed bets in favor of the dollar after a media report flagged the possibility of a downgrade to the US credit rating.
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