The dollar staged a broad fall on Thursday, giving up the previous day's gains after US Treasury Secretary John Snow again urged China to increase the yuan's flexibility.
His comments forced the dollar to session lows against the yen, which is viewed as a proxy for the illiquid yuan, and pushed the US unit lower against other major currencies. Snow, who testified on international economic and exchange rate policies to the US Senate Banking Committee, reiterated his dissatisfaction about the pace of China's efforts to further loosen up its currency regime.
Currency investors also reacted to Snow saying policy makers should refrain from commenting on the foreign exchange markets right now.
One strategist said this is a tacit acceptance on the part of US officials of a decline in the greenback to help adjust global imbalances.
However, for the time being the dollar should remain fairly well supported despite Thursday's decline, as this short-term corrective pattern is intact, analysts said.
"Even though the euro has rebounded and the dollar could not sustain yesterday's momentum, we still made lower highs in the euro for the second consecutive day. So although dollar fans will be disappointed today, the bigger picture is that momentum could be slowly but surely changing," said Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston.
At least in the short term, he said, $1.2850 should provide sturdy resistance for the euro, with $1.2690 the next possible downside target. A breach above this level could herald a return to $1.29 and above, he said.
By late afternoon in New York, the euro was up nearly 0.7 percent against the dollar at $1.2820, while the dollar was slightly lower against the yen at 110.94 yen.
Against the Swiss franc, the dollar was down 0.5 percent at 1.2086 francs, while sterling rose 0.3 percent to $1.8895.
Comments by Richmond Federal Reserve President Jeffrey Lacker also helped the dollar. He struck a hawkish note when he told reporters after a banking conference that the US inflation outlook was "at the borderline of acceptable."
Lacker's remarks heightened growing concern that inflation may be accelerating at a faster pace and warrant more policy tightening from the Fed that could jeopardise economic growth. Snow's comments followed remarks from European policy-makers this week, most notably French Finance Minister Thierry Breton on Wednesday, who have stepped up their rhetoric against dollar weakness after the currency's sell-off following a meeting of the Group of Seven economic powers last month.
The G7 called on emerging countries, especially China, to adopt more currency flexibility to fix global imbalances.
Also on Thursday, the government said US initial jobless claims rose last week to a seasonally adjusted 367,000 due to a partial government shutdown in Puerto Rico, a US territory. The unexpectedly large number had little impact on the market.
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