The euro edged up 0.1 percent to $1.1345, having hit a high of around $1.1355 earlier on Wednesday, its strongest level since August 2016. The common currency has gained 1.4 percent this week. The euro's rally came after ECB President Mario Draghi said at a conference in Portugal on Tuesday that deflationary forces had been replaced by reflationary ones.
But any change in the ECB's stance should be gradual as "considerable" monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions, he added. Traders said the euro could add to its gains in the near term.
"With the hawkish tone of Draghi, we should see European rates moving higher, especially on the 10-year part of the curve, and I think the euro has more room to move higher," said Tareck Horchani, head of sales trading for Asia-Pacific for Saxo Bank Group in Singapore. The euro now faces resistance at $1.14, and could get a further boost if that level is breached, Horchani said.
Against the yen, the euro eased 0.1 percent to 127.23 yen . The euro had touched a high of around 127.47 yen on Tuesday, its strongest level since April 2016. Draghi's comments were taken as pointing to the possibility that the ECB may announce a tapering of its massive bond purchases in coming months, possibly as early as September, said Sim Moh Siong, FX strategist for Bank of Singapore.
At the same time, the ECB probably won't want to see the euro rise too rapidly, he said. "There could be a push-back if the euro is perceived to have strengthened in a manner that is too fast for the ECB's liking," Sim said, adding that the ECB might highlight the risk that the euro's rise could exert downside pressure on inflation.
The dollar remained on the defensive after US Senate Republican leaders postponed a vote on a healthcare overhaul on Tuesday, as they faced resistance from party members.
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