The euro gained more than 1.5% against the dollar on Wednesday as risk appetite returned to financial markets and energy and commodity prices eased from recent peaks that were driven by Russia's invasion of Ukraine and the Western sanctions imposed in response.
After touching a 22-month low on Monday of $1.0806, the euro was last at $1.10645, up 1.57% on the day.
The move was driven in part by recent reports that the European Union was discussing a joint bond issuance to finance energy and defense spending, said Mazen Issa, senior FX strategist at TD Securities.
"Looking at the options market, the signal there has been a reduction in downside protection for the euro, so that could be signaling that the market thinks we may be moving on from the very acute phase of the shock," he said of the single currency's reaction to the Ukraine crisis.
A month ago, the euro was close to touching $1.15, and its rapid decline to below $1.10 may have been overdone, said Joseph Trevisani, senior analyst at FXStreet.com.
"That's an extremely fast and steep move, and so I think we're seeing some profit-taking and also some reversal based on that," he said.
Against a basket of currencies including the euro, the dollar fell 1.077% to 98.052, after hitting a 22-month peak on Monday.
Markets also welcomed a pullback in commodity prices that have contributed to surging inflation and added to uncertainty around economic growth expectations.
Oil prices plunged on media reports that OPEC producers United Arab Emirates and Iraq said they would support increased production, potentially offsetting some of the supply disruptions caused by sanctions on Russian oil.
Brent crude fell more than 17% to hit a session low at $105.60 during a sharp sell-off, before recovering to $114.69 a barrel. U.S. crude was down 9.7% at $111.69.
The drop in oil prices also contributed to a rally by Wall Street's main stock indexes, with investors snapping up stocks hammered by concerns over Western sanctions on Russia.
"It's certainly a risk on move today in all the markets," said Trevisani.
European currencies such as Poland's zloty and Hungary's forint rose sharply, rebounding from record lows against the euro, also supported by both central banks hiking rates on Tuesday.
The European Central Bank meets on Thursday but amid the specter of stagflation, money markets expect policymakers to delay rate hikes until late in the year.
"European currencies have been under heavy pressure for the past couple of weeks and some of these valuations have begun to look stretched," said Jane Foley, head of FX Strategy at Rabobank in London.
Sterling rose 0.47% against the dollar to $1.3162, Poland's zloty jumped %5.78 against the greenback to 4.3145 and Hungary's forint rose 4.03% to 341.28.
In the United States, President Joe Biden signed an executive order on Wednesday requiring the government to assess the risks and benefits of creating a central bank digital dollar, as well as other cryptocurrency issues, the White House said.
Analysts viewed the long-awaited executive order as a stark acknowledgement of the growing importance of cryptocurrencies, such as bitcoin and ether, and their potential consequences for the United States and global financial systems.
Bitcoin rose 8.71% to $42,130, on track for its biggest gain since Feb. 28, while smaller peer ether added 5.06% to $2,708, also set for its best day this month.