The euro hit a two-month high before easing a little on Tuesday, bolstered by strong demand for the euro zone rescue fund's first bond sale, while world stocks held steady.
The European Financial Stability Facility (EFSF) launched its first sale of bonds, with market sources saying demand, at 48 billion euros, dwarfed the 5.5 billion on offer.
Sentiment is positive for the major currencies against the greenback. The euro may be further supported if demand proves strong and the EFSF bonds are oversubscribed as expected, said Roberto Mialich, senior currency strategist at Unicredit in Milan.
Markets are also increasingly speculating that the European Central Bank will lift interest rates ahead of the Federal Reserve, after recent tough comments by ECB chief Jean Claude Trichet about the need to keep inflation in check.
The euro edged lower to $1.3616, after hitting a two-month high of $1.3688, according to electronic trading platform EBS.
Clearly there is a strong demand at the EFSF bond debut, but there is always a risk of buy the rumor and sell the fact for the euro, said Jeremy Stretch head of currency strategy at CIBC World Markets.
There are always structural issues in the euro zone but that takes nothing away from the strong bids that we have seen.
The dollar index <.DXY>, which measures the performance of the greenback against a basket of major currencies, was steady at 78.053.
Debt from the euro zone's higher-yielding sovereigns has also performed strongly in recent sessions on hopes the stability facility will be strengthened.
But they came under pressure on Tuesday after a Spanish government statement on the cost of recapitalizing Spanish banks was met with skepticism.
The Portuguese/German 10-year bond yield spread widened to 380 basis points from around 370 bps at Monday's settlement. The equivalent Spanish spread widened 5 bps to 204 bps.
Spain's weak savings banks have 7 months to boost capital through private investors or the state will partially take them over, Economy Minister Elena Salgado said on Monday, adding that their total capital requirements should not exceed 20 billion euros.
Peripherals are coming out a bit weaker this morning -- the market seems to be a bit underwhelmed by the Spanish announcement of 20 billion to recapitalize their cajas. That's at the low end of what the market thinks they need, a trader said.
World stocks measured by MSCI All-Country World Index <.MIWD00000PUS> edged up 0.1 percent after rising in the two previous sessions.
Europe's FTSEurofirst 300 <.FTEU3> was flat while Tokyo's Nikkei average <.N225> climbed for a second straight session, up 1.2 percent.
An improved economic growth outlook and expectations of upbeat corporate earnings have also buoyed equities recently. Germany's Siemens
Three-quarters of the 84 S&P 500 <.SPX> companies that have reported results so far in this earnings season have beaten analysts' estimates.
Thomson Reuters Propriety Research estimated that the earnings of the companies of the S&P 500 will rise on average 34.5 percent for the quarter, up from an estimate of 31.9 percent earlier this month.
Adding to the optimism, the International Monetary Fund revised its world growth forecast higher and said a package of U.S. tax cuts should give a lift to a global economic recovery that had already begun to gain speed late last year.
Copper lost 1.5 percent, weighted down by worries about Chinese inflation and a more bearish technical outlook, while oil fell for a second straight day, down 0.3 percent to trade below $88 a barrel, as an expected rise in U.S. stocks.
(Additional reporting by William James, Tamawa Desai and Anirban Nag in London, editing by Mike Peacock)