The euro rose to within half a cent of last month's record high against the dollar on Tuesday, bolstered as concerns about euro-selling intervention receded and by dollar nervousness ahead of US capital flows data.
Speaking on Monday, European Central Bank President Jean-Claude Trichet passed up an opportunity to express concern over the euro's strength, leaving markets with the impression that intervention to stem the currency's rise was not imminent.
Sentiment towards the dollar was also fragile ahead of monthly data from the US Treasury Department on international flows into US assets.
Doubts over the United States' ability to attract sufficient overseas inflows to offset its current account gap have been a key driver of the dollar's two-year decline.
"The market is looking at the financing of the US external deficit as a key driver of dollar weakness," said Trevor Dinmore, foreign exchange strategist at Deutsche Bank.
"The dollar's most volatile day in November, December and January coincided with the release of this report, so it is understandable the market is nervous."
The euro rose 0.75 percent to a peak of $1.2877 in the European session, coming within a whisker of January's record high just below $1.29. The single currency was also 0.75 percent higher against the Japanese currency at 135.80 yen.
The US Treasury is expected to release portfolio flow data for December at around 1400 GMT. Net purchases of US assets by foreigners reached $87.6 billion in November, but most analysts are expecting a smaller figure this time round.
US industrial production data for January is due at 1415 GMT.
Dealers said the euro continued to be buoyed by comments from ECB chief Trichet on Monday.
Speaking before the European Parliament's economic and monetary affairs committee, Trichet stuck to the line agreed by the Group of Seven rich nations that rapid currency moves hurt growth.
The dollar steered a steady course around 105.55 yen throughout the European morning after hitting an 11-day high at 106.00 yen in Asia on nervousness over possible Japanese intervention.
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