Central bank buying and strong German economic data pushed the euro to a one-month high above $1.34 on Tuesday, though doubts about Europe's ability to boost a sovereign rescue fund trimmed its gains in New York trade. Analysts, though, said the euro could yet extend gains in the weeks ahead amid hope policymakers would prevent a debt crisis that has engulfed Greece and Ireland from spreading.
The Chinese yuan in the spot market hit its strongest level since being de-pegged from the dollar in 2005 as Chinese President Hu Jintao began a US state visit. Offshore forwards were little changed, though, suggesting doubts that gains would persist past this week's visit.
After closing its best week against the dollar in nearly two years last Friday, the euro hit a one-month peak of $1.3467 overnight, though lack of progress at a two-day European debt summit sparked a retreat to $1.3380. It was still up 0.7 percent on the day and was on track to outperform the dollar in six of the past trading sessions. BNP, however, has a less optimistic long-term prognosis for the euro, with uncertainty about Europe's handling of its debt crisis seen pushing it toward $1.20 by the third quarter of 2011.
Elsewhere, the dollar fell 0.1 percent to 82.62 yen while sterling hit an eight-week peak of $1.6060 after higher-than-forecast UK inflation data. The dollar recovered from a 2-1/2-year low of 0.9837 Canadian dollars after the Bank of Canada kept interest rates at 1 percent and signalled it may stand pat for longer than markets had expected.
Traders said sovereign buying, including demand from Middle East accounts on Tuesday, has helped the euro since it fell to a four-month low beneath $1.29 last week. While the yuan has appreciated about 3.5 percent against the dollar since the middle of last year, China's Hu has refuted US arguments that it needs to rise more quickly. Some analysts say it may take a stronger euro before China agrees to let the yuan appreciate more rapidly against the US dollar, as a weak euro would undermine Chinese exports to Europe and deprive Beijing of a counterweight to the dollar. The yuan has gained about 3.5 percent against the dollar since mid-2010, and China has resisted US pressure to allow more rapid gains.