SYDNEY The euro and commodity currencies held their ground in Asia on Wednesday as hopes that European banks will take up a large offer of cheap three-year cash from the European Central Bank bolstered risk appetite.
The euro was at $1.3461, having climbed 0.5 percent on Tuesday. It was within easy reach of a 2- month peak of $1.3486 set on Friday and on track to end the month up some 3 percent, its best performance since October.
However, its very success could be its undoing.
"EUR/USD is now in deep overbought territory from an RSI perspective with increasing difficulties to break cleanly above the 1.35 resistance," said Sebastien Galy, strategist at Societe Generale.
"Overall the risk reward ratio of going short EUR/USD continues to improve...however, we are missing the economic trigger for the correction."
While the ECB event is pretty much priced in, traders said a bigger-than-expected injection of cash into the banking system could further shore up market confidence, a risk euro bears are only too aware of.
The ECB money is seen helping ease bank funding strains and could underpin the region's sovereign bond market. This should buy more time for officials to tackle the debt crisis, which now faces an Irish referendum on the European Union's new fiscal treaty.
A 'no' vote would damage long-term funding prospects for country, creating more uncertainty for the region.
The worst performer this month is undoubtedly the yen, which is set to post its biggest fall in 11 years on the euro and over two years against the greenback.
The Japanese currency has come under broad pressure since the Bank of Japan's surprise policy easing earlier in the month, which in part encouraged investors to use it as a funding currency for more lucrative carry trades.
The dollar bought 80.45 yen, having rallied some 6 percent from around 76.00 at the start of the month. It reached a nine-month peak of 81.61 on Monday. The euro fetched 108.31, not far off a three-month high of 109.90 set Friday, a gain of nearly 9 percent this month.
With the euro resilient, the greenback once again found itself on the backfoot. It fell to a near three-month low against a basket of major currencies .DXY at one stage.
That meant higher commodity currencies, with the Australian dollar at $1.0766, near the top-end of the prevailing $1.0600-$1.0850 range. A break out on the topside could see it aim for $1.1000 and then the 29-year peak of $1.1081 set last year.
Australia's retail sales data due at 0030 GMT could provide a bit of distraction for the Aussie. Elsewhere, South Korea reported surprisingly strong industrial output figures [ID:nS6E7N202L] and data from Japan are also due on Wednesday.
Following the outcome of the ECB's cash injection, market attention will turn to U.S. Federal Reserve Chairman Ben Bernanke's semi-annual testimony on monetary policy before the House Financial Services Committee due at 1500 GMT.
"If the Fed chairman emphasises the weakness in investment over recent stronger employment data, that could be telling. In any event, we doubt that Mr. Bernanke will want to put anyone off the scent of more easing steps should economic conditions warrant," BNP Paribas analysts said.
(Editing by Wayne Cole)