The euro rose to a 10-day high on Wednesday after officials said the European Central Bank (ECB) could wind down its stimulus programme by end-2018 and that inflation was rising back to its target. Having revived growth with an unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase scheme, the ECB has been debating whether to end the purchases this year as the threat of deflation has passed and the bloc is on its best growth run in a decade.
Many traders expected the central bank to remain cautious at its June 14 policy meeting given the uncertainty caused by a political crisis in Italy.
But ECB chief economist Peter Praet said on Wednesday the central bank would next week debate whether to gradually unwind bond purchases. Germany's central bank head said market expectations for an end to bond-buying this year were plausible.
The comments pushed the euro up half a percent to a 10-day high of $1.1780 and the currency also hit an eight-day high of $1.1640 versus the safe haven Swiss franc. As well as boosting the euro, analysts said the comments would introduce heightened volatility in the options markets over the ECB meeting.
"Markets have already factored in a US rate hike; that means the ECB is the most likely trigger for heightened volatility and I'm expecting to see that as we head into the meeting," said Ulrich Leuchtmann, head of FX strategy at Commerzbank.
"What's important isn't if they [the ECB] announce the end of quantitative easing now or in July, but whether this will really constitute the end of unconventional monetary policy and a reason therefore to expect higher interest rates," he said.
The euro has gained about 0.8 percent so far this week after hitting a 10-month low of $1.1510 on May 29. The euro's rise put pressure on the US dollar. The index fell 0.3 percent to a 10-day low of 93.604.
The ECB comments followed a speech by Italy's new Prime Minister Giuseppe Conte, whose promise of radical change had a mixed impact on the euro. While his reassurance that leaving the euro was not on his agenda helped to underpin the common currency, the new government's tax cuts and higher welfare spending plan lifted Italian bond yields, undermining investor confidence.
"The market will start to focus on the ECB from now on. Politics in Italy and Spain will play second fiddle as we now have new governments in both countries," said Kazushige Kaida, head of foreign exchange at State Street Bank. Elsewhere the Australian dollar rose sharply after the country's GDP data beat market expectations.
The Mexican peso steadied after falling to its weakest since February 2017 late on Tuesday. The United States has raised the possibility of turning negotiations over the North American Free Trade Agreement into bilateral talks.
That added fuel to speculation the United States could scrap the North American Free Trade Agreement (NAFTA).
The Canadian dollar recovered half a percent from 2-1/2 month lows on Wednesday after a media report that Treasury Secretary Steven Mnuchin is said to have urged Trump to exempt Canada from tariffs.
In emerging markets the Brazilian real fell 1.8 percent to 3.81 per dollar as a poll showed increased polarisation ahead of October presidential elections.
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