The dollar clawed back from early losses on Friday in volatile trade amid a wave of profit-taking in the euro after the single European currency hit a near-record high against the greenback.
Earlier, the US currency fell sharply against its major counterparts on a report that the US trade deficit widened sharply and a surprisingly weak consumer sentiment survey.
Markets were also perturbed by rumours of intervention by the European Central Bank after the euro fell a full cent in less than half an hour, reversing gains posted after the softer-than-expected US data.
Traders said the intervention rumors were fuelled by the sale of some 2 billion euros by a big European bank, a move that accelerated losses in the single European currency.
Traders, however, were unable to confirm the ECB's presence in the market.
"The market may well have been spoofed by the intervention rumours, but the end result is still some pretty ugly short-term price action for the euro," said Shaun Osborne, chief currency strategist at Scotia Capital in Toronto.
"Friday's session will likely qualify as a key reversal day and failed retest of the prior high, setting the market up for a minor correction at least of the past week's rally," he added.
In late afternoon trade in New York, the euro was down 0.5 percent at $1.2737. The dollar was up slightly at 105.52 yen and rose 0.6 percent to 1.2384 Swiss francs.
Sterling was down 0.37 percent at $1.8845 after touching an 11-year high of $1.8978.
Analysts, however, remain bullish on the euro and are likely to buy the currency again on some dips. Next week should provide ample opportunity to renew positions on the euro amid another heavy economic calendar, traders said, with the release of US industrial production and capacity utilisation, the February Philadelphia Fed survey and consumer price data.
Earlier on Friday, two US Senate office buildings and a postal facility in Jersey City, New Jersey, were evacuated due to the smell of smoke and the discovery of a suspicious powdery substance, respectively. Traders said the news weighed on the dollar, but the impact was mild and temporary.
"News of Senate building evacuation could have weighed on the dollar. But it is difficult to tell after such a volatile day," said Lauren Germain, currency strategist at Banc of America Securities.
The Capitol police later said a false alarm prompted the evacuation of the Senate office buildings, and the New Jersey post office was reopened after a two-hour shutdown.
The dollar had fallen sharply earlier under the weight of a trade deficit that grew nearly 11 percent in December to $42.48 billion, more than analysts' forecast of $40 billion.
Then news of a steep decline in consumer sentiment sent the euro a little higher, before it was repelled just below its lifetime high of $1.2898.
"Even if we had a better-than-expected (trade) number, people would have said the only requirement for this number to continue improving is for the dollar to continue weakening," said Ashraf Laidi, chief currency analyst at MG Financial Group in New York. Theoretically, a weaker dollar encourages exports as it makes overseas prices for US goods cheaper while discouraging US purchases of more expensive imported goods. Therefore, a weaker dollar should help narrow the trade deficit, a major component of the current account.
Federal Reserve Chairman Alan Greenspan gave support for this view earlier this week when he dismissed concerns about the dollar weakness, saying it should help narrow the gaping current account deficit.
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