The euro inched up against the dollar on Thursday, tracking gains in European shares on speculation the Federal Reserve may signal more economic stimulus measures, but analysts saw the risk of a correction if such expectations are not met.
Sovereign and eastern European demand boosted the single currency to a session high in early European trade, traders said, keeping the dollar under selling pressure ahead of a highly anticipated speech by Fed Chairman Ben Bernanke on Friday.
Speculation of a third round of quantitative easing has dented the dollar in past weeks, but while investors are worried the U.S. economy may slip into recession, some are unconvinced Bernanke is ready to signal another round of bond-buying to stimulate the economy.
Some analysts say the possibility of another bombshell announcement on monetary policy was unlikely after the U.S. central bank only three weeks ago surprised markets by pledging to keep rates low for the next two years.
As a result, they saw the possibility of a downward correction in higher-risk currencies including the euro and the Australian and New Zealand dollars, which have benefited from recent dollar weakness.
There is a risk of a 'buy the rumour sell the fact' situation after the event and there is a possibility that risk will sell off again, said Ankita Dudani, currency strategist at RBS.
She said that, once Bernanke has spoken, the market's focus will likely move back to Europe's sovereign debt woes and the fragility of the euro zone economy and banking sector, along with the weakening global growth outlook, which will keep investors risk-averse.
The euro rose 0.3 percent on the day to $1.4469 while European shares rose 0.8 percent in early trade. Further gains in the euro were limited by offers from U.S. leveraged investors around $1.4475.
Market participants have also cited offers from Asian sovereign names around $1.4500, which have kept the euro below that level for the past week.
Gains in the euro pushed the dollar 0.2 percent lower versus a currency basket, but the U.S. currency inched up 0.2 percent to 77.10 yen.
The dollar remains supported versus the yen on talk that Japan may enter the FX market to stem ongoing strength in its currency, which rallied to a record high of 75.94 to the dollar last week.
Tokyo traders said short-term players slightly lightened their dollar/yen positions, wary that exporters -- still hoping to sell the dollar above 79 yen if Tokyo steps into the market -- would be forced to offload it early next week in end-of-month-transactions.
But they also said the dollar may strengthen against the yen further in the near term, given the potential for more position unwinding.
The Australian dollar and the New Zealand dollar were little changed on the day, holding gains made earlier in the week.
Some in the market said a profit-taking slide in gold prices helped to boost demand for higher-risk currencies.
But analysts cautioned against reading too much into the move, along with higher equities and the previous day's sell-off in U.S. bonds, saying the moves were likely rooted in position unwinding rather than any big shift in risk appetite or investors' views of economic fundamentals.
I don't think market players are all that bullish about the outlook for the global economy, said Makoto Noji, senior bond and currency strategist for SMBC Nikko Securities in Tokyo.
If economic conditions don't show much improvement as we enter September and October, I think U.S. authorities will face pressure again to adopt additional economic stimulus measures and the dollar could come under pressure, especially against the yen, Noji said.