The euro rose on Wednesday, driven by expectations of higher interest rates, although subdued risk appetite was expected to cap gains and keep the dollar off a 3-1/2 month low versus a basket of currencies. European Central Bank policymakers meet on Thursday, and with eurozone inflation well above its target, markets see the central bank sharpening its anti-inflation rhetoric.
However, analysts warned that a further escalation of the turmoil in North Africa and the Middle East could start to give the dollar and safe-haven currencies a boost. Inflation risks in the eurozone were highlighted by data showing a record monthly rise in producer prices in the region in January, which is likely to concern policymakers. Hawkish ECB talk on Thursday could see the euro test its 2011 highs around $1.3862 before rising further towards $1.40, analysts said, but gains were seen capped ahead of this, with traders reporting large offers around $1.3850-60.
US private payrolls data will also be watched at 1315 GMT, and a weak number could spark talk of a subdued US non-farm payrolls report on Friday and put the dollar under further pressure. The euro was up 0.3 percent at $1.3819, having hit a high around $1.3841 but staying short of a one-month high of $1.3857 hit on Monday. The dollar index last stood at 76.864, down 0.2 percent on the day but recovering from a trough of 76.735 on Tuesday, its lowest since early November.
The dollar rose 0.1 percent against the yen to 81.98 yen, having found support at 81.60 in the past few sessions. Analysts say further dollar gains will depend on US data, particularly monthly jobs figures on Friday, which are expected to jump by 185,000, after a tepid 36,000 rise in January. The New Zealand dollar slid 0.8 percent against the US dollar to $0.7416 and tumbled to a 19-year low against the Aussie after New Zealand Prime Minister John Key told Bloomberg he expected New Zealand's central bank to cut interest rates next week after a devastating earthquake.