The euro climbed to an 11-month high versus the dollar Monday and was broadly supported against major European currencies as investors pared expectations of monetary easing from the European Central Bank and the outlook improved for Spain, the region's fourth largest economy.
The single currency shared by 17 European countries also extended gains against the yen, touching its highest level since May 2011, as Japan's government applied more pressure on its central bank to ease monetary policy, contrasting sharply with the ECB's stance.
However, after hitting the 11-month high just above $1.34 against the dollar, the euro pared gains, weighed down by data showing output at euro zone factories fell for a third straight month in November.
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Nevertheless, the euro posted sharp gains against the Swiss franc and the pound. Against the franc, the euro rose to a 13-month high. The euro also hit a nine-month peak versus the pound.
Neal Gilbert, currency strategist at FX broker GFT in Grand Rapids, Mich., said there is "increased confidence" among investors that "the euro zone economy is turning in the right direction and a recovery is afoot."
He added that increased optimism can be seen in borrowing rates for Spain and Italy, which have seen their 10-year bond yields decrease.
Also helping the euro's cause was a report showing reduced dependence of Spanish banks on ECB funding. Data from the Bank of Spain showed net borrowing from the ECB dropped to 357.3 billion euros in December, down 2.1 percent from November's level. Spanish borrowings hit a high of 411 billion in August.
The euro was last up 0.2 percent against the dollar at $1.3377, retreating from a high of $1.3403, its strongest since late February 2012.
Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York, also said $1.35 is a key level for the currency pair since it would mark a break out of the 2012 range of roughly $1.2040 to $1.3486.
ECB President Mario Draghi's upbeat tone since its policy-setting meeting last Thursday has pushed the euro 2.4 percent higher against the greenback. The recent gains account for most of the euro's 1.3 percent appreciation so far in 2013.
Draghi suggested an interest rate cut was off the agenda for now and pointed to signs of improvement in the euro zone economy as well as in financial markets, which set a supportive tone for the euro.
Some strategists, however, believe the euro's impressive gains have been too swift, leaving the unit vulnerable to a pullback.
Declining borrowing costs for highly indebted Spain and Italy have allayed fears about the euro zone's debt crisis, but the region's economic backdrop remains unimpressive with weaker-than-expected industrial production data.
"This data is a reminder that the region's economy remains fragile and weak," said Brown Brothers' Thin. "Draghi managed to push back expectations of easing, but if we continue to see soft data like this, the possibility of an ECB rate cut becomes more probable."
Draghi's comments in Europe contrast with Japan, where Prime Minister Shinzo Abe said on Sunday the central bank must set a 2-percent inflation target as a medium-term, 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 0.4 percent at 119.45 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.
Yen, Swiss Franc Fall
Against the yen, the dollar last traded at 89.35 yen, up 0.2 percent on the day. The greenback earlier hit 89.67 yen, its highest since June 2010, after breaching an options barrier at 89.50 yen. Traders said, however, it could struggle ahead of another reported options barrier at 90.00 yen.
Japan last week approved a $117 billion stimulus package, the biggest spending boost since the financial crisis, in an effort to support the economy.
Along with the yen, the Swiss franc — both currencies are sought during financial market stress — came under pressure as sentiment toward higher-risk assets improved.
The euro last traded at 1.2330 Swiss francs, up 1.2 percent. The single euro zone currency hit a high of 1.2297 francs, highest since December 2011.
Against the pound, the euro was up 0.6 percent at 83.19 pence. It rose to a high of 83.28 pence, the euro's strongest level since April last year.
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.