NEW YORK: The euro rose against the dollar for a second straight session on Monday in thin trading, boosted by optimism about a European Central Bank plan to step in and buy bonds in order to reduce borrowing costs in Spain and Italy.

It marks the euro's best two-day gain against the dollar in more than nine months.

Earlier on Monday, the euro hit a one-month peak against the dollar, adding to Friday's rally at a time when the market has been very illiquid. Trading in the euro turned choppy in London, but the single currency gained momentum midway through the New York session, as risk sentiment improved with gains in stocks.

“Investors are less pessimistic about the euro zone situation. There is the expectation that something positive will come out of the ECB plan and so investors are more willing to search for risky assets that look attractive,” said Aroop Chatterjee, senior currency strategist at Barclays Capital in New York.

“European assets, for instance, have been somewhat depressed over the last few weeks and it's not surprising that the euro benefits from this easing in risk aversion,” he added.

In midday trading, the euro traded 0.2 per cent higher against the dollar to $1.2414, below a peak of $1.2443 hit in Asian trade, but its strongest since July 5.

Gains in the euro over the last two days totaled nearly 2 per cent, its best two-day showing since late October.

Near-term resistance for the euro was seen at around $1.2478, the 61.8 per cent retracement of its drop from a mid-June peak to a two-year low of $1.2042 struck in late July.

Yet doubts persisted about the ECB's proposed plan of action and many saw more pain for the euro zone before any resolution to the crisis is reached. This meant some investors were inclined to use the euro's bounce to place fresh bets the currency would weaken.

ECB President Mario Draghi said last week the bank would act only in cooperation with the euro zone bailout funds, and would require countries to first ask for help. Spanish Prime Minister Mariano Rajoy has signaled he may seek a full-blown aid package but is still undecided.

“There is a definite dichotomy in investor sentiment at the moment,” said Andrew Cox, currency strategist at CitiFX in New York.

“There has been a good bit of interest from shorter-term traders to fade the recent bout of euro strength given the lack of action and follow-through from (ECB's Mario) Draghi last week.”

On the other hand, Cox cited continued demand for real assets in Europe, both sovereign debt and equities, “which we feel is driven by the dissipation of euro zone tail risk -- a development that could continue to support the euro in the coming weeks.”

The euro zone's common currency was down 0.1 per cent against the yen at 97.08, having earlier risen to 97.79 yen, its strongest since mid-July. The euro was also slightly lower against the Swiss franc and 0.3 per cent weaker against the Norwegian crown.

VOLATILE TRADING

The euro has seen choppy trading since the ECB's policy meeting last Thursday.

While some are relieved the central bank is prepared to act by buying bonds in the secondary market and expanding its balance sheet, many are not convinced this alone will be sufficient to trigger a sustained euro rally.

However, analysts at Morgan Stanley recommend buying the euro at 96.70 yen, with a target of 105.00 yen and a stop at 95.20.

“The ball is now in the politicians' court and we believe it is only a matter of time before they choose, or are forced by markets, to ask for official aid, opening the door for ECB purchases and a tightening of peripheral spreads,” they said in a research note to clients.

Traders said a narrowing in peripheral bond yield spread over Germany was likely to offer some support to the euro in the near term. Besides, hefty speculative bets against the euro meant that the common currency could gain some ground due to unwinding of those positions, before falling afresh.