The dollar fell on Wednesday, but more moderately than its dive the previous session as investors weighed how the European Central Bank will treat euro strength.
"As much as everyone thought that we were going to see a deep correction in the euro's acceleration, the recovery hasn't had much of a momentum," said Lara Rhame, senior economist at Brown Brothers Harriman & Co in New York. "Technically the fact that we couldn't get above $1.2670 could imply that consolidation has a little bit further to go before we see the euro off to the races again."
ECB Governing Council member Nout Wellink reinforced the idea that the bank was not likely to address currency swings with interest rate cuts. Nor did he think the euro's value excessive.
Wellink's comments were in line with remarks on Tuesday by ECB Chief Economist Otmar Issing indicating the bank was more likely to intervene rather than cut rates in an effort to curb the euro's export-crimping strength.
"We saw some comments from the ECB ... but the more they say, the less their comments are going to have an impact," Rhame added.
The euro hit a session high around $1.2673 before slipping to $1.2631 up 0.41 percent from the previous close, according to Reuters data. The euro is up nearly 3 cents so far this week against the dollar.
The dollar fell to 106.90 yen off 0.11 percent a day after Japan's surprise move to loosen monetary policy by raising excess liquidity in the banking system.
Loosening its already simulative monetary policy provides cover for Japan heading into the G7 meeting and allows it to answer critics, chiefly the United States, who say Tokyo is not doing enough to boost the economy.
At the same time, the BoJ sent a clear message it will not stand for a stronger yen, which erodes the strength of Japan's export sector.
Sterling extended Tuesday's sharp rise, the biggest in nearly nine years, to trade at $1.8297 up 0.54 percent on the day. Minutes from the Bank of England's January 7-8 meeting highlighted the possibility for higher interest rates in Britain, saying the global economy and domestic demand were both stronger than forecast in November.
US President George W. Bush's State of the Union address made few ripples in the market, although dealers noted that his appeal for tax cuts to be made permanent boded ill for the US budget deficit and hence the dollar. One bright spot was the greenback's 0.67 percent rise to C$1.2999 against the Canadian dollar, nearly erasing a similar-sized loss in the previous session.
The euro turned tail from last week's record peaks after European Central Bank President Jean-Claude Trichet spoke out about "brutal" currency moves and excessive volatility.
Eurochambres, a European business group, said on Wednesday that Trichet repeated his concerns about excessive swings in the euro's exchange rate at a recent meeting.
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