Dollar sheds recent gains

The dollar backed off a two-month high against the euro and sterling on Wednesday, losing momentum after Tuesday's rally following stronger-than-expected data on foreign capital flows to the United States. The figures showed the US was attracting more than enough foreign cash to fund its huge trade deficit but analysts said that was not enough to end worries about potential funding problems in the future. Those fears were a key driver behind the dollar's fall to record lows against the euro less than a month ago.
"This was a good number but the deficit is not going away just like that," said Peter Fontaine, currency strategist at KBC in Brussels. "And the Fed is worried about the current account deficit."
"At the moment the market is already looking ahead," he said.
Coming up was US consumer price data at 1330 GMT, and investors were waiting for clues on how fast US interest rates will rise in the coming months and boost the dollar's yield appeal.
At 1225 GMT the dollar traded about half a percent down on the day at $1.3090 to the euro, compared with Tuesday's two-month high just beyond $1.30. In December it fell to a life low of $1.3667.
The dollar was also down two thirds of a percent against the pound at $1.8800. Earlier, data on the UK labour market showed a modest pick up in pay growth in the three months to November.
"The recent rise in the dollar fizzled out a little and as soon as people saw this, they jumped in to buy euros just in case we were going back up," said Ian Gunner, head of foreign exchange research at Mellon Bank in London.
Against the yen, the US currency was steady at 102.30 yen, having recovered from a five-year low of 101.67 yen hit on Monday.
The dollar had inched up in late US trading after data showed foreign investors pumped $81 billion into US assets in November, far exceeding market forecasts for $55 billion.
This was more than enough foreign investment to cover the record $60.3 billion trade gap notched the same month, easing concerns about the US trade imbalances.
However, analysts said more was needed to make the market believe the dollar's three-year decline was over.
"The inflows are not a true reflection of underlying foreign appetite for US assets as central banks increase their dollar purchases when appetite for US assets wanes," UBS said in a research note.
"This data is not only volatile but also seasonal...The November result is probably unchanged from October after taking into account seasonality...So while the US funding requirement has increased, portfolio investors are only grudgingly opening their wallets."