The euro jumped to a two-week high against the dollar in European trading hours Tuesday as investors with negative bets on the currency adjusted their investments in case of a positive surprise from the European Central Bank next month.
The single currency traded as high as $1.2428 and hit a seven-week high of ¥98.67 against the Japanese yen as medium- and long-term investors pulled back on euro-negative bets. With no fresh news to fuel the move, analysts said growing expectations that the ECB will take a more active role in resolving the European debt crisis was behind the shift.
"The move was more driven by positioning than any real change in sentiment," said Citigroup C +3.17% in a note to clients.
Speculation that the ECB is considering capping the gap in yields between fiscally weaker euro-zone countries and safer benchmarks has continued to reverberate, despite efforts to pour cold water on the notion by German authorities and by the ECB itself, which said it is too soon to speculate on the possible form of its potential assistance.
"If the ECB really went ahead with plans to cap yields that would be the long-awaited big bazooka solution and a real game changer," said Jaco Rouw, an investment manager at ING Investment Management.
Yields on struggling countries' government debt have already eased on expectations that the ECB will announce measures aimed at reducing stress in the euro zone at its next meeting on Sept. 6.
Market participants are also hoping to gain clues about future policy measures from Jean-Claude Juncker, the head of the group of finance ministers that share the euro as a common currency. He is set to visit Greece on Wednesday. German Chancellor Angela Merkel and French President François Hollande also meet on Thursday.
The more optimistic tone in markets allowed Spain to auction more 12-and 18-month treasury bills than it had planned at an auction, with dramatically lower yields.
The mood held up despite a warning from Fitch Ratings Inc. that the weakest euro-zone countries were likely to face rating downgrades by the end of the year if there was no progress made on finding a resolution to the crisis.
The pound benefited from the move higher in the euro and jumped to a two-month high against the greenback to trade at $1.5778, but the rally lost some of its shine after U.K. public sector borrowing figures for July disappointed expectations for a surplus and showed a budget deficit of £557 million pounds ($875 million).
The currency's strong run was also dented by a warning from Fitch that a change in the government's strategy to cut its deficit would put the country's triple-A rating at risk.
Emerging market currencies were stronger, in line with the generally better investor sentiment.
Around midday in Europe, the euro was trading at $1.2416 from $1.2345 late Monday in New York. The single currency was at ¥98.58 compared with ¥98.01. Sterling was at $1.5763 from $1.55710.
The dollar was at ¥78.77 from ¥79.43 and at 0.9671 Swiss francs compared with 0.9730 francs.
The Wall Street Journal Dollar Index, which measures the dollar against a basket of currencies, fell to 71.408 from 71.710.
—Emese Bartha and Art Patnaude contributed to this article.
