NEW YORK: The euro rose for a third straight session against the dollar on Tuesday, underpinned by expectations the European Central Bank is prepared to act soon to lower borrowing costs for Spain and Italy.
The Australian dollar also rose to its highest in more than four months against the greenback after the country's central bank kept interest rates unchanged at 3.5 percent and dropped few hints about easing soon.
Rising expectations that the ECB could step in as early as next month to reduce crippling Spanish and Italian borrowing costs have sparked a global rally in risky assets since Friday, lifting the euro as well as the Australian dollar.
"There is support arising from expected ECB action in terms of purchasing bonds which is helping ease the pressure on the euro and the euro zone in general," said Sebastien Galy, currency strategist at Societe Generale in New York.
In early New York trading, the euro climbed 0.2 percent higher at $1.2424. It hit a one-month high of $1.2443 on Monday before paring gains. Traders cited an options expiry due later in the day at $1.2400 that could keep the euro close to that level.
There was also reported talk of options barrier at $1.2450. Options players may sell the euro if it climbs close to that level, but the euro's rise could gain steam if the barrier is hit.
Markets were initially disappointed on Thursday when the ECB failed to take immediate action to stabilize bond markets, as the details of how it intends to do this and how effective it will be remain unclear. However, traders and analysts say the bank's willingness to take bold measures could result in further gains for the euro.
"I see further gains in the euro from here because we have breached key technical levels on the upside," said Galy. "If we continue this risk rally and this trend of dollar weakness, then we may hit $1.25 which is a key support in June and we may overshoot this level a little bit before we start trending down again."
Italian Prime Minister Mario Monti's victory Tuesday in a vote of confidence on a bill that would cut spending to rein in the deficit also helped the euro.
But uncertainties remained. There were concerns about the potential for opposition from Germany, the euro zone's largest country, to any large-scale bond-buying programme.
"Skeptics remain and the ECB will have to replace rhetoric with action sooner (rather) than later for this upward move to gain any momentum,' said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey.
"There are still people predicting the $1.2000 level in the euro by year end."
Last week, the ECB indicated any intervention in the sovereign bond markets would not come before September and such a move would come only if governments first applied for assistance from the rescue funds.
SPIKE VS FRANC
Late on Monday, the euro briefly rose to its highest in nearly five months against the Swiss franc on trading platform EBS after a slew of computer generated orders pushed it higher, traders said.
EBS daily charts showed the euro rose to 1.20928 francs after 2000 GMT on Monday from around 1.2015 in a matter of minutes as the algorithmic orders were executed. The euro soon dropped back down and was last at 1.2010 francs, continuing to hold just above the Swiss National Bank-imposed floor of 1.20 francs.
The Australian dollar was up 0.2 percent at $1.0588, having hit a high of $1.0604, its strongest since March 20, after the Reserve Bank of Australia (RBA) kept interest rates steady and appeared in no hurry to cut borrowing costs again.
But the RBA's reference to the Australian dollar in its accompanying statement caught some analysts' attention. The central bank said the currency's exchange rate remains high despite a drop in the terms of trade.
Greater appetite riskier assets lifted the Canadian dollar to its highest in nearly three months at C$0.9966 per US dollar, while sterling rose 0.5 percent to $1.5672 after UK industrial and manufacturing data was not as bad as expected.
The US dollar rose 0.4 percent to 78.56 yen, staying above a two-month low of 77.90 yen struck last week.
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