The euro rose on Tuesday, supported by hopes for a Greek debt restructuring deal that would help the country avoid a disorderly default, possibly setting itself up for a test of a key chart level.
The dollar extended its recent losses versus the yen and hit a three-month low, remaining under pressure after the U.S. Federal Reserve said last week it was likely to keep interest rates near zero at least until late 2014.
The euro got a lift after Greek Prime Minister Lucas Papademos said negotiators had made "significant progress" in talks to strike a restructuring deal for Greek government debt, with the aim of having a definitive agreement by the end of this week.
The single currency rose 0.3% to $1.3180, edging back toward a six-week high of $1.3235 hit last week on trading platform EBS.
The euro faces resistance at that level and also near $1.3244, the 38.2% retracement of the euro's October to January slide.
"If we do get a break of that $1.3244 retracement level, then I think maybe we get a more significant short-covering," said Rob Ryan, FX strategist for BNP Paribas in Singapore.
Ryan, however, said such a rise would probably require Greece actually clinching a debt restructuring deal, adding that the euro could rise towards $1.3500 if that resistance is breached.
A rise in regional equities weighed on the safe haven dollar and helped lend support to the euro, traders said, adding that there was also talk of the potential for dollar-selling related to month-end portfolio adjustments.
"Month-end dollar selling seems to be the theme for the day," said a trader for a European bank in Singapore, adding that while the comments from Papademos gave the euro a lift, the Greek debt talks have yet to be resolved.
Another worrying factor for the euro is a recent sell-off in Portuguese bonds that has sent their yields soaring, fanning concerns that Portugal may be forced to restructure its debt like Greece.
MONTH-END FLOWS
The dollar fell 0.3% against a basket of major currencies to 78.912, underscoring the greenback's broad decline on Tuesday.
Against the yen, the dollar hit a three-month low of 76.175 yen on trading platform EBS at one point, well below last week's high of 78.288 yen, with traders saying the dollar dipped as some market players trimmed their long positions.
That brought the dollar closer to a record low of 75.311 yen hit in late October, a drop that led to massive yen-selling intervention by Japanese authorities.
The dollar last stood at 76.32 yen, steady from late U.S. trade on Monday.
Earlier on Tuesday, before the dollar dipped to a three-month low against the yen, Japanese Finance Minister Jun Azumi warned against a renewed rise in the Japanese currency, vowing to take firm steps against excess volatility and speculative moves in the foreign exchange market.
A trader for a Japanese bank in Singapore said Japanese market players were not all that wary about the possibility of yen-selling intervention at this point, adding that such wariness was likely to increase if the dollar drops down to around 75 yen.
The trader said there was talk of dollar bids down towards 76.00 yen, but added that there was talk of stop-loss dollar offers at levels below 75.80 yen or so.
Some traders say Japanese authorities may be hesitant to intervene unless the dollar hits a record low versus the yen, after the U.S. Treasury last month expressed disapproval over Japan's solo intervention in October.
