The euro rose to a 10-week high against the dollar and its strongest since November versus the yen on Thursday after better-than-expected German data eased concerns about a bleak euro zone economic outlook.
However, the conviction that Greece's latest bailout deal will not draw a line under it or the euro zone's debt crisis was expected to limit gains for the euro, meaning the currency may struggle to hold gains above $1.33.
German business sentiment rose for a fourth month running in February, raising hopes that Europe's largest economy is improving and will avoid recession despite the problems facing indebted euro zone countries.
But the single currency came off highs after the EU commission forecast the euro zone economy to contract by 0.3 percent in 2012.
The euro was up 0.4 percent at $1.3294, off an earlier high of $1.3343, its strongest since mid-December, when it broke above resistance at the 100-day moving average around $1.3305 and the February 9 high of $1.3322.
The German Ifo data was good and is important because it allows the market to exclude the worst scenarios for euro/dollar, said Asmara Jamaleh, currency strategist at Intesa Sanpaulo in Milan.
International investors still trust in the sustainability of core Europe, which is one of the reasons why the euro didn't fall much lower towards parity.
Traders cited talk of Middle East accounts selling dollars, while the euro was buoyed by investors cutting bearish bets against a number of currencies. Sterling in particular was hit by concerns about further UK monetary easing.
Against the yen, the single currency rose to 106.87 yen on EBS trading platform, its strongest since mid-November as the Japanese currency remained under pressure after recent monetary easing there. It was last at 106.52 yen.
The euro will probably reverse this uptrend because the PSI deal on Greece still has to be done and we are edging closer to the March 20 deadline (when Greek bond redemptions are due) so there are many things that could wobble, said Ankita Dudani, currency strategist at RBS.
She added it would be tricky for the euro to break firmly above its $1.30-$1.33 range. Morgan Stanley analysts also said in a note to clients that they continue to advise selling euro/dollar on rebounds and lowered their entry level to $1.3300.
Focus will soon turn to the European Central Bank's second long-term refinancing operation, due next week. Although a high take-up could give the euro and other riskier assets a short-term boost, in the longer-term there are worries ECB policy amounts to quantitative easing and will weigh on the single currency.
The ECB is expected to lend nearly 500 billion euros to banks, although some forecasts were as high as 1 trillion euros.
The euro also rose to a 10-week high versus sterling after Bank of England minutes raised the possibility of more quantitative easing later in the year and encouraged investors to trim short euro positions.
DOLLAR FALLS VS SWISS FRANC, YEN
The dollar fell to a 3-1/2 month low versus the Swiss franc of 0.9035 francs, with traders saying stop-loss sell orders were triggered on breaks below 0.9066 and 0.9050 francs.
Pressure on dollar/Swiss franc also caused the euro to dip down to 1.2051 francs, stopping just short of a reported options barrier at 1.2050 francs.
Traders said a break below would prompt further selling and edge it nearer to the 1.20 franc floor the Swiss National Bank has pledged to defend.
The dollar fell 0.2 percent against the yen to 80.12 yen, off a seven-month high of 80.406 yen hit on Wednesday as Japanese exporters and short-term players took profit above 80 pence and ahead of a barrier reported at 80.50 yen.
Part of the reason for the yen's weakness is the Bank of Japan's surprise easing of monetary policy last week, but there is now growing momentum as key support levels give way, spurring more selling.