LONDON: The euro rose to a three-week high against a weaker dollar on Wednesday, helped by lower euro zone peripheral bond yields, strong company earnings and with the US central bank expected to keep interest rates ultra-low.
However, traders expected gains in the euro to be limited as the currency remained vulnerable to budget problems and political uncertainty in several euro zone countries.
The dollar hit its lowest in three weeks versus a currency basket as traders expected the Federal Reserve to restate its intention to keep rates near zero throughout 2014 and possibly hint at more easing, especially after recent weaker jobs data.
The euro rose as high as $1.3237 on the EBS trading platform, supported by relief as successful debt auctions on Tuesday sent yields on Dutch, Spanish and Italian bonds lower. Equity market gains after strong earnings from Apple, encouraging investors to take on more risk, also helped.
Traders reported offers up to the $1.3250 related to option structures, while technical analysts said the break back above the euro's 55-day moving average at $1.3204 was a positive signal. The euro was last up 0.1 percent on the day at $1.3213.
"Strong earnings yesterday, support for peripheral euro zone bonds, plus the fact that the market is extremely short of euro/dollar should be supportive for the euro," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen.
"Also, the overall message from the FOMC will be that rates will be on hold for quite a long time and if the economy slows they will step in (with more easing)."
The dollar index dropped as low as 79.038 before a Fed statement and accompanying news conference later on Wednesday.
However, some analysts said a more hawkish statement, pointing to improvements in the economy and dimming chances of more stimulus, would come as a surprise and could give the dollar a strong boost.
The German government sticking to its growth forecasts and backing the European Central Bank in returning to a "normal mode" of monetary policy also benefited the euro.
This offset a sale of German 30-year bonds that was technically uncovered as record low yields dampened demand for the safe-haven paper.
"Euro/dollar is gradually drifting lower but not as quickly as many in the market thought, possibly because peripheral yields haven't risen too much," said Paul Robson, currency strategist at RBS.
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