The dollar fell broadly on Tuesday as a recovery in European shares piqued appetite for currencies seen as higher-risk, while the euro extended gains after a strong reading of German economic sentiment.
The dollar stumbled after Russian President Dmitry Medvedev underlined the need for new global reserve currencies before a BRICs summit, which traders took as a signal that Moscow may be looking to cut the share of US assets in its currency portfolio.
The German think tank ZEW said its economic sentiment index rose to 44.8 in June, surging from 31.1 in May and exceeding expectations for a 35.0 print. This suggested market optimism that the economy will recover later this year.
"Risk is back on the table today ... The recovery risk appetite layered atop the improvement in the ZEW has provided the fuel to get (euro/dollar) above $1.39," said Jeremy Stretch, strategist at Rabobank in London.
Adam Cole, global head of currency strategy at RBC in London, said the ZEW's strength was prompted by the recent rally in stocks, which are seen to be correlated with the survey. The next test of health for the German economy would be whether the strength seen in the ZEW survey would feed through to other measures of sentiment and industry, he said.
By 1107 GMT, the euro traded 0.8 percent higher at $1.3905, after climbing as high as around $1.3923 after the ZEW poll. The euro recovered from $1.3748 hit on trading platform EBS early on Tuesday, its lowest since May. Some market participants said options up for redemption during New York trade may incite euro/dollar volatility. IFR reported that 200 million euros' worth of options with a strike price of $1.3900 would expire on Tuesday.
European shares shook off early losses to climb 0.5 percent, while US stock futures rose 0.3 percent. This helped to push the high-yielding Australian and New Zealand dollar each roughly 1 percent higher. The dollar index fell 0.9 percent on the day.
Sterling traded 0.8 percent higher at $1.6437, after data showing a smaller-than-expected fall in UK inflation fuelled expectations that the Bank of England may not need to continue quantitative easing much longer. It rose to a 2009 high against the euro at 84.37 pence.
The dollar traded 1.0 percent lower at 96.80 yen, after falling to 96.08 yen on EBS in early European trade. Traders offered limited reaction to The Bank of Japan's upgrade of its economic assessment on Tuesday, which came after the central bank held interest rates at 0.1 percent.
Traders awaited a summit of BRICs emerging nations - Brazil, Russia, India and China - in Russia, which comes amid rising market speculation that countries may be looking to diversify reserves portfolios. At the moment, these contain a hefty amount of US assets.
Medvedev's comments came after Russian Finance Minister Alexei Kudrin at the weekend said the dollar's status as the world's main reserve currency was unlikely to change in the near term, clouding the market's understanding of Moscow's position.