NEW YORK: The euro hit a two-month high against the dollar on Thursday as Greek leaders clinched a deal on reforms to avoid default, and as Europe's central bank chief flagged tentative improvement in the euro zone economy.
The currency rose as high as $1.3321, and was last changing hands at $1.3285, up about 0.2 percent.
Traders said the euro looked set to stay above $1.30 now that a Greek deal appears to have averted a disorderly debt default; and it could make a run at December highs above $1.35 if markets start rethinking the odds of a euro zone interest rate hike in March.
The European Central Bank held interest rates at 1 percent Thursday but President Mario Draghi said the euro zone outlook, while uncertain, had stabilized.
"That poured a little cold water on expectations of a March rate cut," said Adnan Akant, head of foreign exchange at Fischer Francis Trees & Watts, with $48 billion in assets.
The euro also rallied against the yen, hitting a two-month high of 102.91, while the dollar rose 0.6 percent to 77.40 yen, its highest in nine trading sessions.
Elsewhere, sterling was up 0.3 percent at $1.5850 after the Bank of England met expectations by announcing it would inject another 50 billion pounds into the UK economy. Markets had initially thought its latest round of quantitative easing might begin with a 75 billion pound injection.
Data showing an unexpected decline in first-time applications for US jobless benefits also boosted investor risk appetite and provided another reason for traders to cut bets against the euro.
But the biggest source of relief came from news that Greece would implement the new austerity program required for a 130 billion euro ($172 billion) aid package from the European Union and the International Monetary Fund.
"The market had been cautious earlier this week because it seemed that agreement was stalling, but now that it appears agreement is in place, we're seeing a substantial rally in risk," said Blake Jespersen, managing director of foreign exchange at BMO Capital Markets in Toronto.
He said the euro could rally as far as $1.35 in the coming days if stocks continue to push higher and as hopes grow that the euro zone has skirted the worst of its debt crisis.
But some said budding hopes that both the US and euro zone economies were out of the woods were a bit premature.
"At the end of 2011, everyone was braced for the worst case scenario with a euro zone recession and weaker US data," said David Mann, senior strategist at Standard Chartered in New York.
While Draghi's comments and last month's surprise surge in US hiring have eased those concerns, Mann said both still face headwinds. He said hopes that the US jobless rate would fall much below its current level of 8.3 percent this year may be misplaced.
Some also said that another round of ECB low-interest, three-year loans to euro zone banks due at the end of the month was a reminder of just how fragile the banking system still is.
"I suspect this risk rally may have a little further to run -- until people realize that the expansion of the ECB's balance sheet is not a positive and the debt dynamics of Greece are not sustainable," said Jeremy Stretch, currency strategist at CIBC.
Added Steven Butler, head of currency trading at Scotia Capital: "Greece is only one big hurdle the euro faces. The situation is still a mess and at the end of the day, they still have to implement the austerity. There's still a battle ahead."
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