The euro firmed against the dollar and the yen on Tuesday, before the key German ZEW survey which is expected to show that business sentiment picked up in April, supporting the case for more euro zone rate rises.
The common currency was boosted by comments from European Central Bank Governing Council member Klaus Liebscher, who was quoted as saying there was still "a need for action on inflation", and did not rule out upward revision to the bank's growth forecast for this year.
Last week, the euro fell from a seven-month high against the dollar after ECB President Jean-Claude Trichet seemed to smother expectations for a rate rise in May.
But Liebscher's comments in an interview with Bloomberg News posted on its website, supported expectations that gradual monetary tightening is still very much on the cards this year.
"We saw quite an aggressive move in the euro last week in response to Trichet's dismissing the chance of a May rate hike and the comments this morning have tempered that a little bit," said Ryan Shea, senior market strategist at State Street.
Germany's ZEW economic sentiment index is due at 0900 GMT and forecast to rise to 65.0 in April after an unexpected drop to 63.4 the previous month, suggesting that the economy is strong enough to sustain tighter monetary policy.
By 0736, the euro was up 0.16 percent on the day versus the dollar at $1.2136 It was also 0.3 percent higher against the yen at 143.72 yen, below last week's record highs around 144.90.
The Japanese currency was also a touch softer versus the dollar, at 118.42 yen.
The Bank of Japan kept its near-zero rate policy unchanged on Tuesday, and BOJ Governor Toshihiko Fukui said the central bank was likely to be able to keep short-term interest rates very low as long as inflation was contained.
Fukui's comments did little to change the market consensus for the BOJ to leave raising overnight rates until the third quarter. With a rate rise still far off, traders said the prospects for policy elsewhere were key to currency moves.
"The market is more concerned about how much further interest rates will climb in the United States and Europe than in Japan," said a trader at major Japanese bank in Tokyo.
The dollar rose at the end of last week on solid US jobs data that traders said supported the view that the Federal Reserve would raise rates again after an expected tightening to 5 percent in May.
With the future of US monetary policy seen depending on incoming economic data, traders were expected to scrutinise a run of US numbers later this week including the trade deficit and retail sales for clues about the Fed's action beyond May.
General elections in Italy caught the market's attention with the two main political blocs disputing the outcome, raising the possibility that the euro could suffer if a clear winner is not forthcoming in the euro zone's third-biggest economy.
Centre-left leader Romano Prodi has claimed victory, but Prime Minister Silvio Berlusconi's allies disputed the result.
"A contested result and a split legislature would make governing and achieving fiscal consolidation difficult, perhaps cementing sovereign downgrades," ABN Amro said in a note. Standard & Poor's ratings agency said on Monday that failure by any new government to reduce the country's debt could lead to a cut in long-term ratings.
Elsewhere, the Australian dollar gained around a quarter of a percent versus the US currency, boosted by a sharp rise in the NAB March business conditions index.
The currency has been dragged down to multi-month lows by a weakening New Zealand dollar in recent weeks. But upbeat data has buoyed expectations of a rate hike in Australia in coming months, potentially supporting its currency in the near-term.
The Norwegian crow hit a near-five month high versus the euro, supported by expectations that the Norges Bank will tighten policy faster than the ECB.
The Swedish crown also rose on the day versus the euro, after as-forecast March inflation data.