The euro rose for a fourth straight day against the dollar on Thursday to hit a seven-week high on a report that Spain is negotiating with the eurozone over conditions for aid, though a final decision to request a bailout has not been made.
In the talks aimed at bringing down Spain's borrowing costs, the favoured option is that the existing European rescue fund, the EFSF, would purchase Spanish government bonds at primary auctions while the European Central Bank would intervene in the secondary market to lower yields, sources with knowledge of the matter told Reuters on Thursday.
The news added to risk sentiment that was already in play after the release of Federal Reserve minutes the previous day that hinted at more quantitative easing in the United States. Surveys on French and German business activity that were not as dour as feared also benefited the euro. "We got the pop (in the euro) because we are getting some clarity on this whole bailout package for Spain," said David Song, currency analyst at DailyFX in New York. "Suggestions of a more accelerated approach or common ground is what's helping the euro right now."
The euro last traded at $1.2564, up 0.3 percent on the day, after earlier hitting a peak of $1.2589, its highest since July 4. Fed minutes on Wednesday showed the US central bank may "fairly soon" opt for more stimulus, which investors expect to be a third round of quantitative easing, known as "QE3."
"While this does suggest that the Fed is one step closer to further policy easing, in our view such a move is not yet a 'done deal' for September given the somewhat firmer economic data released after the August meeting," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
The Fed has pledged to keep US interest rates low through late 2014. The dollar pared some of its losses against the euro after St. Louis Federal Reserve President James Bullard told CNBC television that data since the last policymakers' meeting on July 31-August 1 had been somewhat better and that the minutes were "a bit stale." Angela Merkel and Francois Hollande presented a united front towards Greece, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.
Analysts, however, saw scope for further gains for the euro in the near term due to expectations the European Central Bank will act to lower Spanish and Italian bond yields next month.
"There is a lot of momentum, people are still short of the euro and you have both sides of the equation, the Europe side and the US side, coming together," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London. The US dollar last traded down 0.1 percent against the Japanese yen at 78.48 yen with the session peak of 78.69 yen and a session low at 78.34, according to data.