(Reuters) - The euro rose against the dollar for a third straight session on Monday, hitting an 11-month high, as investors continued to embrace the currency on faded expectations of a rate cut from the European Central Bank.
The single currency shared by 17 countries also extended gains versus the yen, hitting its highest level since May 2011, as Japan put more pressure on its central bank to ease monetary policy.
The euro has appreciated 1.2 percent against the greenback so far in 2013, with much of the gains garnered on the upbeat tone of comments made by ECB President Mario Draghi after its policy-setting meeting on Thursday.
Draghi suggested an interest rate cut was off the agenda for now and pointed to signs of improvement in the euro zone economy and in financial markets, which set a supportive tone for the euro.
Declining borrowing costs for highly-indebted Spain and Italy have allayed fears about the debt crisis, but the region's economic backdrop remains unimpressive. Indeed, output at euro zone factories fell for a third straight month in November.
"The euro zone economy appears far from out of the woods, as a report today showed," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C.
"Weak data from the bloc may give investors an excuse to take profit on the euro's remarkable run of late," he said.
The euro was last up 0.1 percent against the dollar at $1.3354, having earlier risen as high as $1.3403, its strongest since late February 2012, on buying by macro funds, traders said. Chartists said the euro's firm break above resistance at $1.33, a level it failed to breach in mid-December and again in early January, meant more gains were in store.
Waning worries about peripheral euro zone debt left room for further gains in the euro, traders and analysts said. It rose to a 13-month high against the safe-haven Swiss franc.
"We are seeing a positive environment for the euro and expect it to hit $1.35 in the three months," said Marcus Hettinger, global FX strategist at Credit Suisse, Zurich.
Draghi's comments in Europe contrast with Japan, where Prime Minister Shinzo Abe said on Sunday the central bank must set 2 percent inflation target as a medium-, not long-term, objective.
This indicates the central bank would have to print more yen to boost the economy.
Against the yen, the euro was last up 0.2 percent at 119.18 yen, having earlier hit 120.12 yen, its highest since May 2011. This came on top of a rise of more than 3 percent last week.
"Given the correlation between the euro and equity markets, the euro should trade higher, towards $1.35 or $1.36, though levels between $1.35 and $1.40 start to look expensive and that's not what the euro zone needs right now," said Richard Falkenhall, currency strategist at SEB.
Falkenhall said improvements in euro sentiment since the ECB announced a plan last year to buy the bonds of indebted countries was contributing to the trend of yen weakness, as previously the yen had gained on the back of euro zone worries.
YEN AND SWISS FRANC WEAKEN
The dollar was last up 0.1 percent at 89.24 yen. After breaching an options barrier at 89.50 yen, the dollar hit 89.67 yen, its highest since June 2010. But it could struggle ahead of another reported options barrier at 90.00 yen, traders said.
Japan last week approved a $117 billion stimulus package, the biggest spending boost since the financial crisis, to try to support the economy.
Along with the yen, the Swiss franc - both currencies are sought during financial market stress - came under pressure as sentiment towards riskier assets improved.
"Risk appetite is improving and that means there is less demand for safe-haven currencies like the Swiss franc," said Credit Suisse's Hettinger. "We expect euro/Swiss franc to rise to 1.24 in 12 months, but that target could overshoot easily."
Later on Monday, investors will turn their focus to a speech by U.S. Federal Reserve Chairman Ben Bernanke for any hints on how long the Fed's asset-buying program will last.
(Additional reporting by Anirban Nag in London; Editing by Nick Zieminski)
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