"Things seem to be improving quite rapidly in Europe. Spain is now injecting funds to its banks, which were at the heart of the problems. Greece looks on its way to secure funding. The crisis appears to be heading for an end for now," said Takako Masai, manager forex at Shinsei Bank.
The euro rose to as high as $1.3125, a level not seen since mid-October and last stood at $1.3110, up 0.15 percent from late US levels and within a striking distance of its September high of $1.31729. In addition, many market players expect the US Federal Reserve to unveil a fresh bond purchase scheme to replace its Operation Twist, a programme that will expire this month, at its policy meeting on December 11-12.
"The Fed is likely to take fresh steps to replace the Operation Twist. Speculation of more aggressive easing in Japan is all over the place, and Australia also cut rates. By default the euro rose," said Makoto Noji, senior strategist at SMBC Nikko Securities.
By contrast, the European Central Bank is widely expected to keep rates on hold at its policy meeting on Thursday. The euro also hit a 7 1/2-month high of 107.95 yen with investors expecting a more dovish stance from the Bank of Japan if the main opposition party wins a December 16 election as seems likely. The single currency last stood at 107.80 yen, up 0.6 percent. The yen also weakened against the dollar, which rose 0.4 percent to 82.22 yen, as three-percent jump from in Shanghai shares prompted risk appetite.
The euro also rose to a 11-week high against the Swiss franc, benefiting from a sell-off in the Swiss currency after Switzerland's largest banks said earlier in the week they would charge fees and pay negative rates on some franc deposits. The single currency rose 0.1 percent to 1.2146 francs, having risen to an 11-week high of 1.2153 at one point on Wednesday.
Some market players think, however, the euro's rally could run out of gas soon, with its relative strength index at above the 70 mark, a level typically seen as indicating an over-shooting in uptrend. The euro's broad recovery also stems in part from investors' buy-back to close their books before the year-end, and fresh selling could start as soon as new year begins, some analysts also said. "I don't think the euro's recent rise reflect a big improvement in the view on Europe. I can't see the euro rising above its February high of $1.3487. The euro is likely to have another tough year next year," SMBC Nikko's Noji said.