LONDON The euro rose against the dollar on Wednesday after better-than-expected French and German growth data indicated the euro zone had probably climbed out of a long recession.
However, further gains for the euro were likely to be tempered as the U.S. currency held broadly firm after forecast-beating data on Tuesday increased the prospects of the Federal Reserve scaling back its stimulus as early as next month.
The immediate focus for the single currency was a flash estimate euro zone second quarter gross domestic product due at 0900 GMT (5:00 a.m. EDT), which is expected to show the currency bloc is recovering after six quarters of contraction.
Economists polled by Reuters forecast quarter-on-quarter growth of 0.2 percent.
The euro was up 0.1 percent at $1.3272 but off Tuesday's high of $1.33175. Traders cited stop-loss sell orders below $1.3230 and a break there could see it slip to $1.3155/85.
"A good euro zone GDP reading will help the euro but it won't push it much higher. It will likely just avoid it from slipping below $1.32," said Niels Christensen, FX strategist at Nordea.
He expected the euro to struggle over the next few months and end the year at $1.25, as improving U.S. data was likely to see the Fed trimming its massive stimulus, moving interest rate differentials in favor of the dollar.
The dollar index hit a near one-week high against a basket of currencies, helped by upbeat U.S. retail sales data on Tuesday that sent Treasury yields sharply higher.
Ten-year Treasury yields last stood at 2.71 percent, just 4 basis points shy of a two-year high.
The data fuelled more talk of an imminent reduction of the Fed's $85-billion-a-month bond-buying program, but further dollar gains are seen hinging on upcoming figures on U.S. industrial output, inflation and housing later in the week.
The dollar index stood firm at 81.80 .DXY, having climbed more than 1.0 percent from the August 8 trough of 80.868.
"We think the Fed will start reducing quantitative easing in September unless we see surprisingly weak data, particularly on payrolls," said Shinichiro Kadota, FX strategist at Barclays.
Atlanta Fed President Dennis Lockhart said on Tuesday he could not rule out the Fed reducing stimulus from next month.
Traders said the market would be extra sensitive to a series of U.S. data due later in the week. Wednesday will see producer price data while Thursday's industrial production and consumer inflation reports are likely to draw more attention.
The dollar rose as high as 98.43 yen, though traders said a move above 98.50 yen looked difficult in the near term.
(Additional reporting by Hideyuki Sano and Wayne Cole, editing by Nigel Stephenson)
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