The euro hit a 12-week high against a broadly weaker dollar on Thursday as month-end demand helped pushed the single currency above a key technical barrier.
A jump in euro zone economic sentiment to a 28-month high and a decline in German unemployment supported the euro's gains.
This contrasted with recent weak data from the United States that has weighed broadly on the dollar, with investors mindful that figures on Friday are expected to show slower economic growth in the country in the second quarter.
Economic resilience in Europe, particularly in Germany, despite the formidable sovereign credit headwinds, continues to fuel an unwinding of bets against the euro and push it higher across the board, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, in Washington, D.C.
But Esiner warned that while the euro is likely to enjoy continued support over the near-term, especially if U.S. data remains weak, its gains may prove limited if concerns about a slowing U.S. economy widen to include the broader global economy.
In morning trading in New York, the euro EUR= was up 0.8 percent at $1.3094, its strongest since May 4. The single currency briefly traded at $1.3106. Traders said gains accelerated once the euro went above $1.3050.
There are a lot of orders in the $1.3050 area which had been targeted. When those were triggered it made for a higher euro/dollar, said Lutz Karpowitz, strategist at Commerzbank in Frankfurt.
Market participants said demand for euros from an Asian central bank in early European trade had sparked wider demand for the single currency, helping push the dollar to a three-month low versus a currency basket. The dollar index .DXY fell 0.7 percent to 81.535.
The euro has risen around 7 percent versus the dollar this month. A upcoming trading target for the single currency is seen at $1.3125, the 38.2 percent Fibonacci retracement of the peak-to-trough move from November 2009 to June.
Comments by a top Moody's Investors Services sovereign analyst on the U.S. worsening debt situation may have contributed to selling in the dollar, some traders said.
Steve Hess, a senior credit officer at Moody's, told Dow Jones Newswires the U.S. government needs to elaborate a credible plan to address its soaring debt in order to maintain its Aaa credit rating. [ID:nN29190063]
MONTH-END EURO DEMAND
Analysts said investors who had been wary of buying the euro before last week's bank stress test results were picking up the single currency again before the month ends, while ongoing short covering would also work in the euro's favor.
Citibank analysts said investors at the same time would sell dollars before the end of the month to hedge the currency exposure on their holdings of U.S. assets.
In a note, they said investors continued to buy U.S. equities into the end of July as U.S. stock markets outperformed other global equities.
This suggests that investors will be on balance net sellers of USD to bring their hedges in line with the increased value of their U.S. assets, they said, adding that the signal to sell dollars was quite strong.
The New Zealand dollar NZD=D4 rose 0.8 percent to $0.7262, recovering from an earlier fall after the central bank raised interest rates by a quarter point, as widely expected, but warned that further hikes could be more gradual.
The New Zealand dollar's recovery was aided by a rise in the Australian dollar AUD=D4, which climbed more than 1 percent to $0.9044. (Additional reporting by Naomi Tajitsu in London; Editing by Padraic Cassidy)