The euro inched up versus the dollar and held near a two-month high today while the safe haven yen nursed heavy losses as markets cheered the European Central Bank's plan to tackle the region's debt crisis.
ECB president Mario Draghi, backing up his promise to do whatever it takes to defend the euro, announced a new and potentially unlimited bond-buying programme yesterday aimed at lowering painfully high borrowing costs for stressed member states.
Mr Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, but the news still gave investors confidence that the ECB has finally taken a big step towards stemming the region's debt woes.
"The ECB's actions afford time, allowing risk appetite to stage a comeback for now," said Vincent Chaigneau, a strategist at Société Génerale.
"Mr Draghi has won a battle, but cannot win the euro area crisis war by himself. The hardest task of all - getting governments to drop posturing in return for leadership and deep reforms - still awaits us."
The euro rose 0.1 per cent to $1.26 40, hovering near a peak of $1.2652 hit yesterday on trading platform EBS, its highest level since early July.
The single currency inched up 0. 1 per cent against the safe haven yen to 99.7 5 yen, near yesterday’s two-month high of 99.80 yen.
Some traders and analysts said the euro may rise further against the dollar in the near term due to the potential for more position squaring, but others were cautious about the outlook.
The ECB's bond-buying scheme could boost European equities and spur falls in Italian and Spanish bond yields over the next few months, but implications for the euro seem more mixed, said Greg Gibbs, senior FX strategist for RBS in Singapore.
"While positive for European assets, it is quantitative easing or does imply that the ECB is now in a place where it will potentially do a lot of quantitative easing," Mr Gibbs said, adding that the ECB's balance sheet could expand due to the bond-buying programme.
"That's not bullish for the euro," he said, adding that the euro could start to be capped relatively soon especially on some of the crosses but also against the dollar.
The dollar inched up 0.1 per cent to 78.9 2. But the yen stabilised after sliding broadly yesterday, when stronger-than-expected data on US private-sector employment triggered a rise in Treasury yields and helped drag the Japanese currency lower versus the dollar.
With the ECB steps likely to help boost investors' tolerance for risk, the yen may be set to weaken further on the crosses, said Tohru Sasaki, chief foreign exchange strategist for JPMorgan Chase Bank in Tokyo.
"I don't think it is the case at all that everything will be okay from here on, but at least there is now a certain framework in place," Mr Sasaki said, referring to the ECB's measures.
"We will probably see a bit of risk-on moves globally and could see the yen weaken and cross/yen pairs push higher.”
How the yen fares against the dollar, however, will hinge on how market expectations evolve over chances for further stimulus by the Federal Reserve, he said.
Investors will be focusing on US jobs data due later today for further hints on whether or not the Fed will launch another bond-buying programme, or quantitative easing, after its policy meeting next week.
The Australian dollar rose 0. 4 per cent to $1.03 23, holding firm after having climbed roughly 0.9 per cent yesterday for its biggest one-day gain in a month as traders trimmed bearish bets against the commodity currency.
A flood of Chinese data on Sunday could provide a challenging backdrop for the Australian dollar, which has retreated over the past month on worries about a slowdown in China, Australia's single biggest export market.