The euro edged higher on Tuesday, hovering near a one-month high against the dollar and supported by expectations the European Central Bank is prepared to act soon to lower borrowing costs for Spain and Italy. The Australian dollar also rose to its highest in more than four months after the country's central bank kept interest rates unchanged at 3.5 percent and dropped few hints it was in a hurry to ease again.
Rising expectations that the ECB could step in as early as next month to reduce crippling Spanish and Italian borrowing costs have sparked a global rally in risky assets since Friday, lifting the euro as well as the Australian dollar. The euro was 0.1 percent higher at $1.2415. It hit a one-month high of $1.2444 on Monday on trading platform EBS, its highest since early July, before paring gains. Traders cited an options expiry due later in the day at $1.2400 that could keep the euro close to that level.
Markets were initially disappointed on Thursday when the ECB failed to take immediate action to stabilise bond markets, while details of how it will do this and how effective it will be remain unclear. However, traders and analysts say the bank's willingness to take bold measures could see the euro gain further. "We are expecting the euro to rise to $1.26 in a month's time and $1.30 in three months partly due to renewed optimism about the euro zone and partly because of the dollar's weakness," said Michael Sneyd, FX strategist at BNP Paribas.
Italian Prime Minister Mario Monti's victory in a confidence vote on Tuesday on a bill to cut spending in order to rein in the deficit also helped the euro. But uncertainties remained. There were concerns about the potential for opposition from Germany, the euro zone's largest country and paymaster, to any large-scale bond-buying programme.
"The euro is holding up quite well ... but it is still a case of a corrective rally rather than any significant rally," said Jeremy Stretch, head of currency strategy at CIBC. Last week, the ECB indicated any intervention in the sovereign bond markets would not come before September and such a move would come only if governments first applied for assistance from the rescue funds.
Traders reported talk of an option barrier in the euro at $1.2450. Options players may sell the euro if it climbs close to that level, but the euro's rise could gain steam if the barrier is hit. Late on Monday, the euro briefly rose to its highest in nearly five months against the Swiss franc on trading platform EBS after a slew of computer generated orders pushed it higher, traders said.
EBS daily charts showed the euro rose to 1.20928 francs after 2000 GMT on Monday from around 1.2015 in a matter of minutes as the algorithmic orders were executed. The euro soon dropped back down and was last at 1.2010 francs, continuing to hold just above the Swiss National Bank-imposed floor of 1.20 francs.
The Australian dollar was up 0.15 percent at $1.0584, having hit a high of $1.0604, its strongest since March 20, after the Reserve Bank of Australia (RBA) kept interest rates steady and appeared in no hurry to cut borrowing costs again. Greater appetite riskier assets lifted the Canadian dollar to its highest in nearly three months at C$0.9976 per US dollar, while sterling rose 0.3 percent to $1.5651 after UK industrial and manufacturing data was not as bad as expected. The US dollar edged up 0.1 percent to 78.34 yen, staying above a two-month low of 77.90 yen struck last week.