SYDNEY (Reuters) - The euro hovered at multi-month highs against the dollar and yen on Wednesday, having extended recent gains as tentative signs of progress in the U.S. fiscal talks bolstered demand for riskier assets.
The Australian dollar, however, barely budged in part because currency speculators were already holding record long positions in the currency.
The euro was at $1.3224, not far off the overnight high of $1.3238 -- a level not seen since May. Against the yen, it fetched 111.35, having scaled a 14-month peak around 111.48, near the Oct 2011 high of 111.57.
"We believe the year-end position squeeze is the main driver of the euro's broad outperformance at the moment, especially as both valuations and positioning are starting to appear stretched for the high-beta currencies," analysts at BNP Paribas wrote in a note.
"Unless U.S. fiscal cliff talks take an unexpected turn for the worse, we believe that EUR/USD will meet our 1.3300 year-end target."
Hopes are high that a deal will be struck between President Barack Obama and House of Representatives Speaker John Boehner to prevent the economy from going over the 'fiscal cliff'. Both sides have made compromises in recent days and the White House remained confident of an agreement.
The dollar managed to hold its ground against a broadly weaker yen, which remained friendless as markets positioned for the Bank of Japan to ease monetary policy on Thursday.
The BOJ kicks off its two-day meeting on Wednesday and is under intense political pressure to expand its asset-buying program aggressively to snap the world's third-biggest economy out of its fourth recession since 2000.
The dollar stood at 84.19 yen, not far off a 20-month high of 84.55 set Monday.
Markets will also be keeping an eye on Japan's trade figures due at 2350 GMT, which could add to the case for bold policy action from the BOJ. The country's exports have been hurt by a fallout from a diplomatic row with China and feeble global demand.
The standout among the major currencies was perhaps the underperformance of the Australian dollar, which slipped on the greenback despite the 'risk-on' market environment.
Traders said further gains were limited for the Aussie given that many speculators already hold bullish positions and need fresh impetus to put on more.
The Australian dollar was at $1.0532, having stalled just below $1.0600 since its rally from the November low of $1.0287 ran out of steam a week ago.
It was still some way off its 2012 peak around $1.0857 and its post-float high of $1.1081 set in mid-2011.
Editing by Wayne Cole