The euro crept back near a two-month high on Tuesday after a jump in eurozone inflation fuelled expectations of a rate hike and as worries about unrest in Egypt abated slightly. Analysts said the euro could add to its gains in the near-term, especially if European Central Bank President Jean-Claude Trichet talks tough on inflation after the ECB's policy meeting on Thursday.
A key will be whether the euro manages to break above last week's two-month high of $1.3760, said Andrew Robinson, FX market strategist at Saxo Bank in Singapore. The 76.4 percent retracement of the euro's November to January slide lies right around $1.3950.
Some market players say the euro could even rise towards $1.40 in the weeks ahead, provided the trouble in Egypt does not spread to other countries. The euro rose 0.2 percent from late US trading on Monday to $1.3722. The euro edged higher after data on Monday showed that consumer prices in the euro zone rose 2.4 percent year-on-year, holding above the European Central Bank's target of just below 2 percent for the second month. There were doubts, however, about how long the euro's rally may last.
Gareth Berry, G10 FX strategist for UBS in Singapore, said worries about the debt crisis could come back to haunt the euro, adding that the UBS forecast was for the euro to be trading at $1.25 at the end of April. Sterling rose 0.2 percent to $1.6051, supported by market expectations that British interest rates may rise as early as the first half of the year.
Sterling hit a 10-week high of $1.6073 earlier on Tuesday, having extended its gains after surging 1 percent on Monday. The Australian dollar held firm after the Reserve Bank of Australia (RBA) ended its monthly policy meeting with a generally upbeat assessment of the domestic and global economy.
The RBA kept its key cash rate unchanged at 4.75 percent, saying the impact of flood damage in Queensland would be temporary and it was still very much focused on the medium-term outlook for solid growth. The Australian dollar extended its gains after triggering stop-loss bids and last stood at $1.0025, up 0.5 percent on the day. The dollar fell 0.3 percent to 81.83 yen, having touched a one-month low of 81.75 yen earlier on Tuesday.