The euro hit a 2-1/2-month high on Tuesday, driven above $1.38 by solid global manufacturing data, though analysts said risk appetite could fade if worries resurface about Europe's ability to manage its debt crisis. Markets considered the crisis in Egypt contained, easing fears it could spread across the Middle East, and that dented safe-haven demand for dollars.
At least 1 million people gathered in Egypt to demand the resignation of President Hosni Mubarak, who said he would not run for reelection. The euro rose as high as $1.3844, its highest since early November, with gains accelerating after it broke above resistance at $1.3786. A close above $1.3750 would open the way for a run to $1.40, "a slam-dunk unless we get some kind of surprise from Europe about the sovereign debt crisis," said Dan Dorrow, head of research at FX execution firm Faros Trading.
Extending its gains further may prove difficult, though, and some traders said the $1.40 level would provoke selling. "The euro anywhere near $1.40 is probably a sell if we get up there," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto. "I still think there are some core fundamental issues in Europe that have not been addressed."
"When the whole world starts buying and talking about the strength of the euro," he added, "it's probably a good time to start fading it." The euro was last up 1 percent at $1.3831. The European Union is said to be working on a plan to reduce Greece's debt burden.
The dollar, which saw a safe-haven bid late last week when protests in Egypt intensified, fell broadly as risk appetite returned, hitting a four-week low of 81.33 yen and falling 0.9 percent against the Swiss franc to 0.9355 francs. The Australian dollar rose 1.5 percent to $1.0115, just off a four-week high, after policy makers gave an upbeat assessment of the domestic and global economy.