NEW YORK (Reuters) - The euro on Friday catapulted to its highest level against the dollar since April 2012, a day after European Central Bank chief Mario Draghi set a bullish tone by not giving any indication the bank would ease monetary policy.
Headed into the ECB's meeting on Thursday market participants had been wary that Draghi would signal rate cuts in the coming months, but he instead gave no hint that they were contemplating a rate cut any time soon, which became a buy signal for some investors.
The euro's 0.5 percent gain added to the 1.6 percent advance on Thursday, its biggest daily gain in five months. Draghi spoke after the ECB left its benchmark rate unchanged at 0.75 percent.
"The market has reacted positively to the absence of any talk of a potential interest rate cut or injection of additional liquidity," said Gareth Sylvester, director at Klarity FX in San Francisco.
"However, we still feel that the euro zone debt crisis story still has a role to play in 2013 and accordingly we see little evidence to support further EUR strength over the medium term," he said.
The euro rose as high as $1.3365 and last traded at $1.3334, up 0.5 percent on the day.
"The euro at $1.3450/$1.3500 remain clear price objectives but from a medium-term perspective we would favour a return back towards the $1.2600/1.2700 area," he said.
The common currency shared by 17 countries also hit its highest since December 2011 against the Swiss franc.
Against the yen, the euro hit a peak of 119.32 yen touching its highest level since May 2011. It last traded at 118.94, up 1 percent on the day.
While U.S. data had marginal impact on trading it did not hinder appetite for risk.
The U.S. trade deficit unexpectedly grew in November, exerting a drag on economic growth, although the gap's widening was driven by a surge in consumer goods imports, which gives a positive signal for consumer spending.
Currency speculators reduced their bets against the U.S. dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday.
The value of the dollar's net short position fell to $6.96 billion in the week ended January 8, from $9.43 billion the previous week.
"Altogether, the news from the past 24 to 48 hours has mostly been negative for the greenback and positive for foreign currencies," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"While it is possibly a mild surprise that the U.S. dollar is not showing more consistent weakness, we suspect the near-term direction remains lower for the greenback against most foreign currencies," he said.
The market's focus, with the ECB meeting concluded, remains the yen as investors continued to debate whether the advance in the U.S. currency to a 2-1/2-year high was too far, too fast given the outlook for further easing by the Bank of Japan.
Analysts said the current weakness in the yen is likely to continue.
Analysts said such dips in dollar/yen were only temporary, with the overall trend of yen weakness intact. Some expect to see the dollar well above 90 yen in coming months.
Ian Stannard, head of European FX strategy at Morgan Stanley in London said the pullbacks in dollar/yen have been very shallow and this underlines the strength of this trend.
"The pace of increase not just (in dollar/yen) but also the pace of policy reforms in Japan is exceeding market expectations," said Stannard.
"As a result we have raised our forecast even further ... looking for dollar/yen to move toward the 95 level by the end of this quarter."
The yen has been sinking since November on speculation the BOJ could ease policy further. Analysts expect the BOJ to adopt an explicit 2 percent inflation target at its policy meeting on January 21-22, to fall in line with the aims of the government.
The dollar rose as high as 89.44 yen on Friday, its strongest since June 2010, after Japanese Prime Minister Shinzo Abe's government approved a $117 billion fiscal stimulus package, its largest since the financial crisis.
The dollar was last up 0.5 percent at 89.18 yen, according to Reuters data.
Additional reporting by Nick Olivari and Wanfeng Zhou; Editing by James Dalgleish