The euro rose against the dollar and yen Tuesday, returning to its months-long trend of appreciation, as better-than-expected euro zone data affirmed expectations that the European Central Bank will keep policy steady when it meets this week.
While the euro gained ground, it remained vulnerable to profit taking, especially with its recent sharp and swift move higher drawing the attention of policymakers. French President Francois Hollande called on the euro zone Tuesday to protect the currency from "irrational movements," but German Economy Minister Philipp Roesler said countries must focus on boosting competitiveness and not on cutting the value of their currency.
The comments did not have an immediate impact on the euro, but served as an indication of the growing split among leaders on the euro's strength, and this could check its further gains. Nevertheless, investors bought the euro as upbeat economic data affirmed that the worst of the region's debt crisis is likely over.
The euro zone's battered economy is probably recovering but the gulf between its two biggest members is widening, according to a survey on Tuesday that showed business optimism in the bloc at an eight-month high.
Euro zone data showed the services sector had improved more than expected in January.
The euro earlier hit a low as political uncertainty weighed on the currency. In Spain, the prime minister is facing calls to resign and Italy holds a general election later this month.
"While investors are inclined to take profits on the euro ahead of the ECB meeting, any weakness will likely become a buying opportunity," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Should Draghi hold a relatively upbeat news conference on Thursday that echoes the one he held last month, it will be a green light for the euro to return to recent highs," he said.
The last traded at $1.376, up 0.5 percent on the day. That put it near the session peak at $1.3597, but still below a near 15-month high of $1.3711 struck on Friday. Chart support was seen at $1.3414, a low hit on January 29.
(Read More: Euro Zone Inflation Nears ECB Goal, Record Joblessness)
The ECB is unlikely to contemplate an interest rate cut at Thursday's policy meeting despite the euro's sharp rise, but its chief almost certainly faces a grilling afterwards over an Italian banking scandal.
Currencies
The euro's strength will need to show significant harm to the economy before the Governing Council reverses course, and there is next to no chance of that happening at its monthly meeting.
"Draghi will likely refrain from explicitly talking down the euro but he might try to tone down his outlook for euro zone growth and inflation. A correction lower in euro/dollar could be in the cards if we see more profit-taking on euro longs," said Valentin Marinov, head of European G10 FX strategy at CitiFX, a division of Citigroup.
"That said I don't see outright shorts being put in place ahead of the ECB given the risks for potential further gains if the ECB decides to ignore the euro appreciation for now."
Rising risk tolerance also boosted the euro in New York trade when a report showed the U.S. services sector grew in January. "The economy continues its grudging recovery with services following manufacturing after the second-half slump last year," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, N.J.
Yen Weakness
Bank of Japan Gov. Masaaki Shirakawa said he would step down on March 19, three weeks before the official end of his term. He is likely to be replaced with someone who is amenable to Prime Minister Shinzo Abe's drive to ease policy aggressively and get Japan out of deflation.
"The Bank of Japan is about to get a lot more dovish — and sooner than previously thought," said Christopher Vecchio, Currency Analyst at DailyFX in New York.
(Read More: Weak Yen Yet to Reach Corporate Japan's Bottom Line)
The dollar rose as high as 93.61 yen, its highest since mid-2010. It last traded at 93.53 yen, up 1.3 percent on the day.
The euro last traded at 126.97 yen, up 1.7 percent on the day, with the session peak of 127.16, the highest since mid-April 2010.
Strategists said further yen weakness could be checked due to growing opposition from other countries before a G20 meeting in Moscow later this month.
"Japan could face a growing backlash about its recent policies which has produced a sustained yen weakness, and given that euro was the currency that appreciated the most, this could mean the Europeans in particular could complain about the loss of international competitiveness," Marinov said.