The single currency rose to 1.2762 on easing concerns over the banks in Eastern Europe and hopes that Germany may step in to help weaker European economies. Goldman Sachs Group Inc. recommended buying the euro at current levels with a target of $1.35 and said the threats that Eastern Europe's woes pose to the eurozone have been priced in by the market.

German Finance Minister Peer Steinbrueck said ‘we would show our ability to act’ to help countries in the euro region which are experiencing serious financial problems and added that betting on a breakup of the currency ‘is absolutely absurd’. However, German Chancellor Angela Merkel declined to comment on whether Germany would step in to bail out any member of the euro region. Angela Merkel said she would not speculate on the relative health of fellow member countries. The single currency retreated from 1.2762 in U.S. session on profit-taking together with the disappointment over Merkel's comments as investors expected Merkel would announce a commitment to support weaker countries in Europe and euro ended the day at 1.2673.

The greenback rose against the Japanese yen from 93.30 to 94.47 on reduced demand for the Japanese currency as a safe haven due to the weakness in Japan’s economy. Euro, aussie and sterling rallied versus the Japanese unit from 117.30 to 102.34, from 59.70 to 61.53 and from 132.94 to 136.34 respectively.

Federal Reserve Bank of Atlanta President Dennis Lockhart said U.S. would not suffer a Japan-style deflation but the risk was being taken very seriously. Lockhart said U.S. inflation rate is at an acceptable level but is watching for further price disinflation to a point that might pose a problem. U.S. PPI and core PPI rose by 0.8% and 0.4% in January respectively. U.S. leading indicators also came in better-than-expected at an increase of 0.4%.

Bank of England Deputy Governor John Gieve said there is a risk of Britain entering the kind of downturn Japan witnessed for a decade but it is by no means inevitable as policymakers have taken dramatic action. The British pound rose from 1.4213 to 1.4449 before retreating to end at 1.4292 after the dovish comments.

Friday will see the release of Japan’s all industry index, German services and manufacturing PMI, U.K. retail sales, U.S. CPI and real earnings.