The dollar fell against the euro on Tuesday after an unexpected jump in U.S. pending home sales in December, easing demand for the greenback as a haven.
But gains in the euro were limited as many in the market stayed sidelined before the European Central Bank's rate decision on Thursday when it is widely expected to leave interest rates on hold at 2 percent.
An announcement by the Bank of Japan of a plan to buy up to 1 trillion yen ($11 billion) in listed shares held by Japanese banks also helped boost sentiment earlier, but its impact may be limited, analysts said.
The housing report "is a real shot in the arm for (risk) sentiment," said Brian Dolan, chief currency strategist at Forex.com, in Bedminster, New Jersey. "Stocks are rallying."
In late morning trading in New York, the euro was up 1 percent against the dollar at $1.2979, after trading as high as $1.2997 earlier.
The dollar was 0.3 percent lower at 89.14 yen.
Pending sales of existing U.S. home rebounded in December as buyers took advantage of lower prices and mortgage interest rates. The National Association of Realtors Pending Home Sales Index surged 6.3 percent in December.
U.S. stock indexes got a lift and the dollar fell also as the U.S. Federal Reserve said it extended liquidity facilities and currency swap lines with 13 central banks to keep money flowing into the banking system.
"Euro/dollar has been trading on the back of risk aversion and sentiment in the past couple of days. Any news that brings risk aversion lower and helps lift stocks at this point will hurt the dollar," said Matt Esteve, a foreign exchange trader at Tempus Consulting in Washington, D.C.
Esteve said the euro could trade as high as $1.3250 in coming weeks.
WEAK EUROPEAN DATA
In Europe, pressure will remain on the ECB to cut interest rates further in the coming months as data again pointed to waning inflationary pressures and a weakening economy.
Figures on Tuesday showed euro zone producer prices fell a bigger-than-expected 1.3 percent, while German retail sales unexpectedly fell for a third straight month in December.
The prospect of rates staying on hold, however, is helping to limit the euro's downside, analysts said.
"With limited developments ... the euro, which is slightly oversold, is likely to drift higher," Marc Chandler, a currency strategist at Brown Brothers Harriman in New York, said in a note.
