The dollar climbed against the euro on Monday, supported by a report showing increased foreign demand for US assets in June, but some investors were already placing bets the euro would push back later in the week.
The United States attracted $71.2 billion worth of foreign capital in June, the largest net inflow since February and more than enough to cover its trade deficit, the Treasury department's report showed.
"It alleviates concerns over the ability of foreign capital to finance the current account deficit," said Paresh Upadhyaya, portfolio manager with Putnam Investments in Boston. "The data was supportive for the dollar."
By late afternoon, the euro was down 0.6 percent at $1.2364 after having hit a 2-1/2 month high of $1.2486 on Friday. Against the Swiss franc, the dollar was up 0.6 percent at 1.2545 francs. The pound slipped 0.1 percent to $1.8117.
In recent weeks investors have shifted their focus to structural weaknesses in the US economy. On Friday, trade data showed the deficit had widened to $58.8 billion in June, the third-largest on record.
The dollar's 30 percent decline in the three years to 2004 stemmed mainly from concerns about the ability of the United States to finance its massive current account deficit, which at $195.1 billion in the first quarter reached 6.4 percent of gross domestic product.
Daniel Katzive, currency strategist with UBS, said getting the euro to hurdle the psychologically important $1.25 level this week - with US inflation and regional economic reports due later in the week - might be a challenge. Heavy interest to sell euros lies between $1.2460 and $1.25, he said, the result of the dollar's rebound in May, which caught many long-term investors off guard.
Nevertheless, some investors in the currency options market are positioning themselves for the euro to surpass $1.25 this week.
Tom Rogers, senior currency analyst with IFR Forex Watch, noted solid investor demand on Monday for 2-day euro/dollar calls with a strike price of $1.25 - essentially a contract with the option to buy euros for $1.25 on Wednesday.
According to the Treasury report, foreign net buying of US corporate bonds rose to a record high $52.24 billion in June from $20.39 billion in May on a record overall $49.9 billion in private corporate bond buying.
But foreign net purchases of US Treasury bonds and notes - the main component of US current account financing - dropped to $7.92 billion in June from $27.58 billion in May, the lowest amount of foreign buying since September 2003.
Private foreign investors were net sellers of Treasuries for the first time since August 2004.
The dollar rose against the yen after the report but then reversed direction, falling 0.1 percent on the day to a fresh six-week low of 109.22 yen.
The Japanese currency has risen more than 2 percent against the dollar over the past week, supported by growing confidence in Japan's economy, foreign buying of Tokyo stocks and the easing of concerns about a September 11 snap election.
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