The euro held onto its recent gains today on budding hopes that Ireland is near a deal to shore up its banks and budget deficit, although the currency stopped short of breaking above major resistance.
The euro also got a marginal boost after Federal Reserve chairman Ben Bernanke gave a full-throated defence against criticism of the bank's controversial bond-buying programme, showing no signs of backing away from implementing the plan.
But analysts warned that the euro was not out of the woods yet with Ireland's debt troubles threatening to spill over to other highly indebted peripheral euro zone countries such as Portugal.
There is also uncertainty whether China will adopt more stringent measures to keep a lid on inflation, including a drastic rise in key interest rates.
The euro was clinging to most of the gains built up since bouncing from Tuesday's seven-week low, trading at $1.3640, flat on the day and up more than 1 per cent from Tuesday's trough around $1.3446.
"I feel that the worst for the euro is over," said a trader at a US bank. With its fall to a seven-week low, the euro had given back half of its gains from late August to November 4th.
"The last time the euro was in an adjustment, in August, it rebounded after achieving a 50 per cent retracement," the trader added.
The single currency still needs to get above resistance at $1.3750/1.3785, however, to put an end to the downward correction of the last couple of weeks.
Against the Japanese currency, the euro was near 114.00 yen, recovering from a fall to 112.23 yen on Tuesday.
Upbeat US economic data, including a drop in a closely watched gauge of jobless benefits to a two-year low, helped to lift the dollar to a six-week high of 83.79 yen yesterday.
It last traded at 83.49 yen, finding the going tough around the session high of 83.66, which also represents a 61.8 per cent retracement of the September to November fall.
The top end of a cloud on the daily ichimoku chart, which serves as resistance, is at 83.68 yen, although a convincing break above that could see the dollar retest 84.20 before reclaiming 85.94 yen, highs last seen in mid-September.
Sparking hopes of imminent aid for Ireland's shattered banks, central bank governor Patrick Honohan said he expected Dublin to receive tens of billions of euros in loans from European partners and the IMF to provide stand-by funds.
"It feels like we're getting closer to some sort of resolution ... so that's certainly seen euro get a better tone," said Grant Turley, strategist at ANZ. "People are waiting to see what shape or form the package might entail."
Healthy bids for Spanish bonds at a sale yesterday further helped to settle nerves, triggering a rally in European and US stocks. It pushed Wall Street's favourite pulse of investor anxiety, the CBOE Volatility Index, down nearly 14 perc ent.
Fed chairman Mr Bernanke also reiterated the case for the Fed to act now in the text of a speech for delivery to a conference at the European Central Bank in Frankfurt later in the day. The text was released ahead of his scheduled appearance today.
Reuters