The dollar sagged broadly on Thursday as traders continued to lighten their bets on further strength in the currency, ahead of what is expected to be a risk-prone September.
The euro rose for the fourth consecutive session, up 0.2 percent compared with late Wednesday to $1.2296. It retraced the prior week's losses but came up short of reported automatic stop-loss buy orders around $1.2330 and chart resistance at $1.2350.
Trading conditions were thin, with some dealers' positions only a third of their normal size, according to one trader in New York.
"It's typical end-of-August liquidity issues, so I think the market is getting knocked around a bit," said T.J. Marta, senior currency strategist at RBC Capital Markets in New York.
So far this week direction in the market has been lacking and liquidity limited as many traders were off on vacation and long weekends loomed this week and next. Traders and analysts will likely watch for headlines from Federal Reserve Chairman Alan Greenspan's speech on Friday.
But many were not expecting much movement in the market at all.
Hawkish comments on Wednesday from Chicago Federal Reserve President Michael Moskow warning of building US inflationary pressures and need for continued vigilance - that is, more interest rate increases - failed to lift the dollar on Thursday.
Volatility is expected to pick up next month as traders return from vacation and elections in Japan and Germany get underway. Meetings of the Group of Seven rich nations, the International Monetary Fund and between China's President Hu Jintao and US President George W. Bush.
The dollar's losses were biggest against the Swiss franc, with the US currency down 0.6 percent at 1.2567 francs.
The dollar eased against the yen at 110.06 yen although its downside was limited by a rise in euro/yen to 135.35 yen.
Sterling's rise, up 0.1 percent, was limited and seemed capped at around $1.8027 by a fairly buoyant euro/sterling.
The euro had built up momentum since Tuesday's news that Germany's ZEW investor confidence indicator hit a 17-month high. But the Ifo business sentiment index unexpectedly dipped to 94.6 in August from 95 the previous month and a forecast rise to 95.2. The latest record oil price of $68 a barrel overnight also helped to damp dollar sentiment. While not a direct drag on the dollar, constant headlines of record oil prices raise questions about the strength of the US economy.
"Unless oil drops convincingly below $65 a barrel, I don't think it (the oil price) will add much upside to the dollar," said Ron Simpson, managing director of global currency analysis at Action Economics in New York.
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