The dollar sagged on Thursday, pressured by a sharply weaker-than-expected US regional manufacturing survey, but the currency remained range-bound as dealers awaited comments on US inflation due next week from the Federal Reserve.
Though the dollar finished near session lows, the losses were mitigated by an increase on the employment measure of the survey from the Federal Reserve Bank of Philadelphia, which suggested the US job market remains on the path to recovery, and by a separate report that showed foreign investment in US assets was large enough in July to offset the yawning current account gap.
"The market is basically at a crossroads. It is still confused as to where the economy is headed. Even though the Philly Fed survey was pretty weak, the employment component of the survey was not," said Kathy Lien, chief strategist with Forex Capital Markets in New York.
Traders found more reason to sell dollars in the early afternoon on bearish comments from Federal Reserve Governor Edward Gramlich on the US economy. Gramlich is a voting member of the Federal Reserve Open Market Committee, which meets on Tuesday to set monetary policy.
The Philadelphia Federal Reserve's business conditions index for September was 13.4, much lower than the 28.5 in August and economists' consensus expectation of a dip to 24.5.
Meanwhile, the latest Treasury international capital flows data for July showed a net US inflow of $64.0 billion, down from a revised $74 billion inflow in June.
In light of recent trade and current account data, the United States needs about $1.5 billion of capital inflows a day to finance that deficit.
In late trade, the euro popped up to a session high of around $1.2199, rebounding from the fresh one-week low of $1.2121 hit earlier in the session and $1.2150 just before the Philadelphia Fed number.
Against the Japanese yen, the dollar was off 0.4 percent at 109.53 yen.
Most US economic indicators on Thursday fell within general expectations, so market reaction was relatively muted.
Having posted solid gains during the previous session, the dollar drifted back lower, as dealers booked profits but resisted long bets on the euro ahead of the Fed's meeting. As a result, the dollar has maintained a narrow trading range for the past three months against the euro zone currency.
Sterling continued to be one of the biggest movers on Thursday, rallying after UK retail sales jumped 0.6 percent last month. Economists had expected a fall of 0.3 percent.
The pound was up 0.9 percent at $1.7937, while the euro was at 67.93 pence, sliding about 0.7 percent from its seven-month high the previous day.
The Swiss franc was a touch stronger after the Swiss National Bank raised key interest rates by a quarter-percentage point on Thursday. The dollar was down 0.3 percent at 1.2672 Swiss francs.
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