The euro dipped on Wednesday as the European Central Bank's huge injection of three-year cash into the banking system lifted riskier currencies like the Australian and New Zealand dollars at the expense of the single currency. The flood of cash was expected to encourage carry trades, where investors use lower-yielding currencies to buy riskier assets and higher-yielding currencies.
Traders said short-term traders were selling euros to buy commodity-linked and emerging market currencies. The euro was last down 0.1 percent at $1.3453, having hit a session low of $1.3425, taking it away from a three-month peak of $1.34869 hit on the EBS trading platform last week. The currency has risen nearly 3 percent this month, marking its best monthly performance since October but leaving room for profit-taking.
The ECB alloted 530 billion euros, close to expectations for around half a trillion and adding to a liquidity boost that has eased immediate fears about the euro zone's debt crisis.
Traders, however, said the market had been largely positioned for the result, leaving limited scope for euro gains while analysts warned it may help but would not solve the bloc's structural problems. "If you were going to take profit from any trade put on in the last few days it would be in the euro, but if you've got this liquidity you can put it into risk assets," said Neil Mellor, currency strategist at Bank of New York Mellon.
The Australian dollar hit a 7-month high against the US dollar of $1.0857, extending gains after breaking above the February 8 high of $1.0845. The New Zealand dollar also hit a 6-month high and the Canadian dollar a five-month peak versus the US currency.
These growth and commodity-linked currencies all gained against the euro, pulling back after sliding during the second half of February. "We came into this in a risk-on mood and the fact it was in line should allow most of the risk-on trades to resume their climb," said Daragh Maher, FX strategist at HSBC.
Market players will now turn their attention to testimony by Federal Reserve chairman Ben Bernanke at 1900 GMT, where any hints that more easing measures remain a possibility could further support riskier currencies and weigh on the dollar. The worst performing currency in February was the yen, which is set to post its biggest fall in 11 years against the euro and in over two years against the greenback in the wake of unexpected easing measures from the Bank of Japan. The dollar was steady against the yen at 80.38 yen, with support on the daily Ichimoku chart at 80.23 yen. The euro fell 0.25 percent to 108.40 yen. Traders said trade could also be dominated by month-end rebalancing flows, which were expected to be broadly negative for the dollar. The dollar index was down 0.1 percent at 78.202.