The euro hit an 11-week high against a broadly weak dollar on Thursday as month-end demand for the single currency helped push it above a key barrier.
The euro remained supported by firm euro zone data, with figures on Thursday showing euro zone economic sentiment jumping to a 28-month high, while German unemployment declined for the 13th consecutive month.
This contrasted with recent weak data out of the U.S. which 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.
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.
Data in the euro zone for now is pretty resilient and at the margins that argues for euro/dollar to edge higher, though people are pretty cautious at these levels, said Tom Levinson, currency strategist at ING.
By 1137 GMT (7:37 a.m. EDT), the euro was up 0.6 percent at $1.3075, just shy of a high of $1.3091, its strongest since May 10. Traders said stop-loss orders were triggered above $1.3050, accelerating the currency's gains, with options barriers seen at $1.3100.
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.
So far this month, the euro has risen around 7 percent versus the dollar. Investors are now focusing on whether it can rally to $1.3125, the 38.2 percent Fibonacci retracement of the peak-to-trough move from November 2009 to June.
Gains in the euro helped push the dollar .DXY down to 81.535 versus a currency basket, its weakest since late April.
Some in the market said California Governor Arnold Schwarzenegger's announcement that the state was in a state of emergency over its finances was another reason to dump the dollar as it highlighted the country's fiscal problems.
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.
At the same time, Citi analysts said investors 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 the rise in 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 rose 0.9 percent to $0.7268, 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, which climbed more than 1 percent to $0.9044, nearing an 11-week high hit earlier in the week.
(Additional reporting by Jessica Mortimer; editing by Stephen Nisbet)