The euro rose to a near four-month high against the dollar on Wednesday and looked set to extend gains on growing expectations interest rates in the eurozone will rise earlier than those in the United States. The Swiss franc soared to a record high against the dollar as escalating tensions in Libya and fears of contagion to other oil-rich countries, especially Saudi Arabia, prompted investors to seek safety in the Swiss currency.
The European Central Bank holds its policy meeting on Thursday. With oil prices trading above $100 a barrel and eurozone inflation well above target, investors expect the ECB to sharpen its anti-inflation rhetoric. After struggling in recent sessions to break above resistance at $1.3862, its previous 2011 high, the euro pierced that level as North American trading got underway.
The euro could make a run toward $1.40 should post-meeting comments from ECB President Jean-Claude Trichet reinforce expectations of an interest rate hike, analysts said. "The perception is growing in the market that the ECB will certainly be hiking rates sooner than the Fed and that has really underpinned the euro for the time being," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.
The euro climbed as high as $1.3890 on trading platform EBS, its strongest level since November 9. It last traded at $1.3869, up 0.7 percent on the day. Euro zone producer prices rose in January at the fastest rate in the history of the single currency, data showed on Wednesday, highlighting the risk that the ECB may raise rates sooner than expected.
Traders reported option-related offers ahead of $1.39. Further upside targets include $1.3947, around the 76.4 percent retracement of the euro's fall from November to January, and $1.3958, the 200-week moving average. The dollar index, which tracks the greenback against a basket of major currencies, fell to as low as 76.529, its lowest since early November 2010. The dollar was little changed at 81.89 yen, after falling as low as 81.57 yen on EBS, a near one-month low. The greenback hit an all-time low of 0.9202 Swiss franc on EBS and was last down 0.5 percent at 0.9237.