The euro hit a two-month high versus the dollar on Wednesday on perceptions that interest rates will rise sooner in the eurozone than in the US, taking out option barriers on the way and approaching key resistance. The dollar hit a 10-week low against a basket of currencies with the market looking for confirmation from the Federal Reserve later in the day that its focus remains on supporting growth.
The euro rose to $1.3723 on trading platform EBS, its highest since November 22, before dipping back to $1.3693. Traders said a large option barrier was taken out at $1.3720, with more barriers highlighted at $1.3725 and $1.3750. Stop-losses were reportedly lurking above the latter level.
The euro stalled ahead of a key technical level around $1.3740, the 61.8 percent retracement of its fall from November to January. Beyond that, its November 22 high of $1.3786 is seen as a major target. The dollar index was down 0.2 percent at 77.809, having hit a 10-week low of 77.748.
Analysts expect the US central bank will keep short-term rates near zero and will say it remains committed to its $600 billion bond purchase programme in its policy announcement later today. The dollar was under pressure after US bond yields fell on news of President Barack Obama's proposal to freeze portions of federal spending in his State of the Union address on Tuesday.
The FOMC's policy outlook contrasts with that of the ECB. Governor Jean-Claude Trichet has warned about rising inflation in the region, sparking talk of a rate hike later this year and helping to widen the euro's rate advantage over the dollar. The euro also continued to benefit from strong demand for inaugural bonds from Europe's financial rescue fund on Tuesday. Asian investors, including the Japanese government, took up more than one-third of the 5 billion euro offer. The dollar was flat at 82.16 yen, not far from last week's two-week low of 81.85.