(Reuters) - The euro rose against the dollar on Thursday as some investors speculated that the European Central Bank would announce bold new steps to tackle the debt crisis and boost appetite for riskier currencies.
The ECB left interest rates unchanged, as expected. Bank President Mario Draghi holds a news conference at 1230 GMT.
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Draghi's pledge last week to do everything necessary to preserve the euro has led investors to position for the possibility of strong measures that would boost the currency. Many anticipate the ECB could reactivate its bond buying programme to bring down high borrowing costs in Italy and Spain.
The euro rose 0.5 percent to a session high of $1.23044 on trading system EBS, clear of last week's two-year low of $1.2042.
It also climbed 0.1 percent against the Japanese yen.
But analysts cautioned that high expectations left plenty of room for disappointment, especially as the German central bank has stated its opposition to the ECB buying peripheral government bonds.
"People are talking about expectations being high after Draghi sent a strong signal. You could get a very disappointed market," said Christian Lawrence, currency strategist at Rabobank.
"One thing for sure is that we'll get a sharp move one way or the other in the euro, but the balance of risks are for it to be lower ... Markets are impatient, they want the crisis solved now and market reaction will probably reflect that."
If Draghi failed to announce anything significant the euro could slide below chart support at the 200-hour moving average around $1.2218, setting it up for a test of its 2-year low and of $1.20, Lawrence said.
However, if the ECB did announce a fresh bout of bond buying the euro could test last week's high of $1.2390 as investors who earlier bet against the single currency are squeezed out of short positions.
The euro also gained after Spain sold slightly more than planned at a sale of government debt, though analysts expected trade in the currency to remain muted before Draghi's news conference.
DRAGHI AWAITED
Sterling showed little reaction after the Bank of England held interest rates and its quantitative easing target. The pound was last up 0.2 percent at $1.5570.
As focus turned to the ECB, the dollar dipped 0.25 percent against a basket of currencies, cutting some of Wednesday's gains after the Federal Reserve refrained from offering new stimulus.
A Munich-based daily said Draghi was planning concerted action using both the ECB and the future euro European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy in order to help push down borrowing rates.
The newspaper added, however, that a final decision was not expected until after September 12, when the German Constitutional Court rules on whether the ESM is compatible with the constitution.
Some strategists said perceived riskier and higher-yielding currencies like the Australian dollar could be hit even harder than the euro if the central bank falls short of expectations.
"We have seen some long risk positions built up on the back of expectations central banks in general will do more. There's scope for disappointment on that front although we're more likely to see it in the Aussie and Canadian dollar rather than the euro," said Michael Sneyd, FX strategist at BNP Paribas.
The Australian dollar rose 0.5 percent against the U.S. dollar to $1.0514, close to Wednesday's four-month high of $1.0543, while the Canadian dollar rose to C$1.0025, near a 2-1/2 month peak of C$1.0003 hit earlier this week.
The dollar was down 0.3 percent at 78.21 yen, staying just above a two-month low of 77.90 yen hit on trading platform EBS on Wednesday.
(Additional reporting by Nia Williams, editing by Nigel Stephenson)
