Investing.com - The euro moved higher after hitting 14-month lows against the dollar on Tuesday after investors felt the single currency had fallen too far on sentiments U.S. monetary policy will become less accommodative while the European Central Bank stays loose.
In U.S. trading, EUR/USD was up 0.13% at 1.2911, up from a session low of 1.2859 and off a high of 1.2925.
The pair was likely to find support at 1.2754, the low from July 9, 2013, and resistance at 1.2962, Monday's high.
The euro weakened to 14-month lows earlier due to growing expectations that monetary policies in the U.S. and Europe will diverge, sentiments fueled by hawkish language in a Federal Reserve Bank of San Francisco report on Monday, which hinted that markets may be underestimating the pace at which rates may rise, evidenced by low volatility.
"Recently, subdued levels of volatility in financial markets have received some attention. For example, Federal Reserve Chair Janet Yellen (2014) noted that 'indicators of expected volatility in some asset markets have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward,''" the report read.
"Prices of financial assets, such as stocks and bonds, are sensitive to unexpected changes in interest rates because their present values are determined by discounting future cash flows. Thus, the low volatility in asset markets could, in part, reflect market participants' relative certainty about the future course of interest rates."
The euro, meanwhile, came under recent pressure due to a recent European Central Bank decision to trim its benchmark interest rate to a record-low 0.05% from 0.15%.
The central bank also lowered its deposit facility rate to -0.20% from -0.10% previously and its marginal lending rate to 0.30% from 0.40% and added it will begin an asset-backed securities purchasing program to shore up the recovery.
By Tuesday, investors felt the single currency had dipped too far and snapped up nicely priced positions, though the dollar held steady.
Elsewhere, the euro was up against the pound, with EUR/GBP up 0.19% at 0.8023, and up against the yen, with EUR/JPY up 0.38% at 137.22.
While no major U.S. data is due for release on Wednesday, investors are already prepping for Thursday's report on initial jobless claims and Friday's data on retail sales and consumer sentiment.
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