The euro surged to a two-year peak against the dollar and an all-time high against the yen on Thursday on hopes the European Central Bank will signal that interest rates need to rise further later in the session.
Traders were caught off guard by the euro's sudden jump to as high as $1.3469 before the ECB's expected decision to keep rates on hold, which was driven in part by a spike up in the single currency to a nine-year high against the Swiss franc.
The single currency's jump also coincided with the Australian dollar scaling a 17-year high against the US dollar after data showing a drop in Australia's jobless rate to a 31-year low solidified expectations for higher interest rates there.
Worries about the health of the US economy are hampering the dollar just as market players keep dumping low-yielding currencies like the yen and Swiss franc to fund purchases of higher-yielding currencies in the carry trade.
"It looks like the carry trade is back," said Noriyuki Kato, treasury management at State Street Global Markets in Tokyo. "You've got to surf along the waves of the weak dollar and the carry trade." The euro was up 0.2 percent at $1.3460 its highest since January 2005, getting a boost from the trigger of stop-loss orders around $1.3450.
The single currency hovered near the latest all-time high around 160.85 yen hitting a record peak since the euro's launch in 1999 for a third straight day. The dollar edged up slightly at 119.41 yen just off a six-week high of 119.55 yen struck the previous session.
The strong Australian jobs data drove the Aussie as high as $0.8273 before the currency eased back to $0.8252. The ECB meets later in the day and is widely expected to keep rates on hold at 3.75 percent, but investors are looking for ECB President Jean-Claude Trichet to give some signal that rates will rise to 4.0 percent by June.
Market players are looking to see if Trichet opts to use the term "strong vigilance", his typical signal that rates will be lifted at the next policy meeting. Most economists expect the next move to come in June rather than May.
"There's no doubt Trichet is going to set more strongly the ground for a June hike," said Sharada Selvanathan, currency strategist at BNP Paribas in Singapore.
The ECB's steady rate increases have given the euro a boost and stand in contrast to expectations for the Federal Reserve to begin cutting rates later in the year and the Bank of Japan's pledge to keep any monetary policy tightening very gradual.