The euro rose against the dollar on Wednesday as a recovery in stocks in Europe and on Wall Street helped ease investors' appetite for safe-haven currencies such as the U.S. dollar and the Japanese yen.
The rebound in equities, combined with a report showing U.S. home prices rose in February and news of a sell-off in the British pound earlier, contributed to the gains in the European common currency, analysts said.
"U.S. stocks suddenly took off, bringing European shares up and the euro," said Dan Cook, a senior market analyst at IG Markets Inc in Chicago. "The correlation with equities is very strong, and with any improvement in share prices we also see a bit of a return to risk."
Cook said a U.S. report showing a slight rise in home prices in February triggered the rebound on Wall Street.
Stocks had fallen earlier, led lower by financial shares after Morgan Stanley (MS.N) posted a second quarterly loss and slashed its dividend.
The dollar and the yen had benefited recently from concerns over the outlook for the financial system and the global economy.
The euro traded as high as $1.3036, according to Reuters data, after dropping to $1.2886. In midday trading in New York, the euro was last up 0.7 percent at $1.3032.
The euro currency also rebounded against the yen to trade as high as 128.12, after sliding to 126.21.
Cook said he expects euro/dollar to trade between 1.25 and 1.31 in coming weeks. Still, a break above 1.31 may push the euro further to 1.32, he said.
Demand for the euro zone single currency had risen after British Finance Minister Alistair Darling forecast that the country's economy will shrink 3.5 percent this year as public sector net borrowing jumps.
His comments sparked a sell-off in sterling and helped push the euro up 1.8 percent versus the pound to 89.81 pence. Meanwhile, sterling was down 1.1 percent against the dollar at $1.4502.
"As sterling tumbled, we've seen demand for the euro and other crosses coming up," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York. "The budget news had a negative impact."
Other analysts also expressed concern about the impact on the UK economy of such a large jump in government borrowing.
Investec's chief economist Philip Shaw in London said forecasts for net borrowing of 5.5 percent of gross domestic product in 2013-2014 "is an extremely high level of government borrowing over the medium term".
