The euro rose to its highest in more than five weeks against the dollar on Friday, heading for its fourth straight month of gains, as investors clung to hopes that U.S. politicians would reach a fiscal deal before the end of the year.
The yen slumped and was on track for its worst month since February against the dollar on speculation that a likely change in Japan's government would lead to aggressive monetary easing.
For the past few weeks, financial markets have traded on headlines from U.S. political leaders on the "fiscal cliff," which refers to tax hikes and spending cuts worth $600 billion set to kick in early next year that could hurt the economy.
U.S. House of Representatives Speaker John Boehner said Republicans and President Barack Obama are locked in a stalemate. Obama blamed Republicans who control the House of holding up a deal.
"The market is sort of anticipating that some kind of a compromise will be reached before Dec. 31. That's the mindset of the market right now," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.
The euro settled back to $1.2982, having earlier touched $1.3027, its strongest level since Oct. 23. Traders reported offers at $1.3040-50. For the month, the euro rose 0.3 percent against the dollar.
German lawmakers on Friday approved the latest Greek bailout by a large majority, also helping euro sentiment. But the outcome was widely expected. Gains in Europe's shared currency came despite weak data that included a sharp drop in German retail sales, a fall in French consumer spending and record-high unemployment for the euro zone.
The gloomy economic outlook for the euro zone should limit further strength in the euro, analysts said.
"With unemployment still sitting at 11 percent in the euro zone and inflation at just 2 percent, I can't see how the euro can move up from here, other than people looking at an alternative to the dollar," said Chris Gaffney, co-chief investment officer at Everbank Wealth Management in St. Louis, Mo.
The euro dipped to session lows against the dollar after weak U.S. personal income and spending data. The data dented the market's risk appetite as investors sought the dollar for its safety appeal.
"The disappointing data has dampened the modest enthusiasm that major economies are gaining strength," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "The report also reinforces the fact that U.S. growth in Q4 would be weak."
Gearing Up for Japan Election
The dollar was last nearly flat at 82.46 yen, but had earlier reached near the eight-month high of 82.82 yen hit last week. It was on pace for a gain of 3.4 percent in November, the biggest since February.
The euro was up 0.5 percent to 107.08 yen . Earlier it climbed to 107.66, its highest since late April.
Traders cited month-end demand for the euro from Japanese importers. In November, the euro rallied 3.8 percent, the best month since June against the yen.
Although main opposition leader Shinzo Abe, a front-runner to become the new prime minister, seemed to have softened his aggressive stance on Bank of Japan independence, he did reiterate his desire for the bank to buy foreign bonds.
"The market is gearing up towards the Dec. 16 election," said Eliasson. He said with growing expectations for further easing, the dollar could rise further to 85 or 87 yen if the election goes as expected.
The dollar index ended the month of November up 0.3 percent after three straight months of losses.