(REUTERS) - The euro hit two-month highs against the dollar and yen on Thursday as hopes Greece would clinch a bailout deal encouraged investors to unwind bearish positions, although sentiment was cautious before a Eurozone monetary policy decision.
The European Central Bank is seen holding interest rates at one percent but many believe it will signal a readiness to cut in March to a new record low, which may temper euro gains.
However, with the market optimistic that Greece will avoid a messy default, analysts said the euro could push higher in the short-term despite persistent worries about unsustainable debt levels in some Eurozone countries.
Once we get beyond the ECB meeting I wouldn't be surprised to see a further move higher in euro/dollar. The technical configuration is good and short covering is on everyone's minds, said Niels Christensen, currency strategist at Nordea in Copenhagen.
The euro was up 0.1 percent at $1.3268 against the dollar, having earlier hit a high of $1.3313, its strongest since mid-December. Its next target is the 100-day moving average around $1.3331.
Market players say the euro could gain further if Greece secures a debt restructuring deal as speculators still hold near-record short positions in the currency.
But they also said any deal would offer only a short-term boost to the euro given the uncertainties about Greece and other Eurozone economies.
Greek political leaders have agreed on all points of a bailout package except one - pension cuts - and officials said discussions with international lenders would continue so a deal could be concluded before Eurozone finance ministers meet on Thursday.
Some analysts expected ECB President Mario Draghi to strike a mildly upbeat tone after Thursday's rate meeting, pointing to recent improvements in Eurozone purchasing managers' data as a sign the ECB's liquidity measures have had a positive impact.
He could face tough questions about the ECB's Greek bond holdings, however, whether a deal has been struck or not.
The ECB announces its decision at 7:45 a.m. ET, with Draghi's news conference scheduled for 8:30 a.m. ET.
Short-term optimism played out and the euro went above $1.33 on the view that there would be a (Greek) deal sooner rather than later, said Jeremy Stretch, currency strategist at CIBC.
I suspect this risk rally may have a little further to run - until people realize that the expansion of the ECB's balance sheet is not a positive and the debt dynamics of Greece are not sustainable.
Against the yen, the euro rose as high as 102.766 yen on EBS trading platform, also its strongest since mid-December. It was last up 0.2 percent at 102.38 yen.
Market participants also awaited a Bank of England policy decision at 7 a.m. ET that is expected to bring a further 50 billion pounds of quantitative easing to boost the UK's flagging economy.
While a 50 billion pound infusion is broadly expected and priced in, a larger asset purchase program could hurt sterling; a good number of economists polled by Reuters predict a further 75 billion pounds of QE.
Sterling was up 0.1 percent at $1.5836, well below a 12-week high of $1.5929 hit on Wednesday but holding up after stronger-than-expected UK industrial output data dampened recession fears.
The dollar index fell to a two-month low of 78.407, while the higher-yielding Australian dollar was up 0.2 percent at $1.0811, close to a six-month high of $1.0845 hit on Wednesday.
The dollar rose versus the safe-haven yen to hit 77.243 yen, its highest in nearly two weeks, although traders see limited chances of the U.S. currency breaking above last month's high of 78.29 yen given offers from Japanese exporters lined up towards 78 yen.