The euro rose above $1.22 versus the dollar for the first time since late 2014 on Monday as investors raised their expectations that the European Central Bank will be forced to tighten monetary policy sooner than current forecasts.
In minutes from its latest policy meeting, the Bank reiterated its decision to continue buying assets at a reduced rate of €30bn a month until September, but that interest rate increases would not be considered until the quantitative easing scheme was wound up.
Hawkish signs at ECB
However, there were some signs that members of the governing council were starting to become a little more hawkish, with mention of "upside risk" for the first time when considering the growth outlook.
“It looks like 2018 could be a year of change for the European Central Bank, and the euro has jumped against the dollar in response," said Hamish Muress at OFX.
"The central bank has taken a conservative stance over the last 12-18 months, but it would appear that a few members are pushing to review its position on forward guidance, and perhaps reduce the overall asset purchase programme that’s presently in place."
The major sticking point before the ECB would be likely to consider any move on rates is inflation, which remains well below the central bank's 2% target rate.
Consumer prices in the eurozone stood at an annual rate of 1.4% in November, and expectations for the December figure - published on Wednesday - don't see it moving any higher.
Policy divergence with the Fed
Yet, the euro remains dominant on foreign exchanges despite the policy divergence between the US and the eurozone.
The Federal Reserve has already made four quarter-point rate increases since December 2016, bringing the main Fed funds rate to 1.5% by the end of 2017, and is widely expected to make at least another three moves higher in 2018.
"The euro continues to hold up well against the dollar despite the rise in US rates, and a 25-basis point Fed hike in March is 80% priced now," said Chris Turner, head of FX strategy at ING.
Also supporting the euro in the recent sessions were developments in the German political deadlock over the formation of a coalition government, with both potential partners back at the negotiating table.
By mid morning in London, the euro was up strongly again against the dollar, rising 0.8% to $1.2292. Sterling eased 0.12% to €1.1238.