The dollar rose against the euro on Thursday after minutes from the Federal Reserve's latest policy meeting stoked expectations that the central bank will raise interest rates again later this month.
Minutes released on Wednesday from the May 10 meeting show that policy makers were not sure how much higher rates should climb, if at all, but a mention that inflationary pressures were increasing helped boost expectations that rates would rise.
The minutes offered an incentive to buy back the dollar in a market rattled by concerns about the recent sell-off in world share markets and uncertainty about US currency policy under Treasury secretary nominee Henry Paulson.
US President George W. Bush on Tuesday named Paulson, chairman of investment bank Goldman Sachs, to succeed John Snow as Treasury chief.
"The Fed's minutes set off short-covering in the dollar," said Koichi Yoshikawa, head of forex trading at BNP Paribas. "It's not that speculators are taking new positions, they are just unwinding old positions."
The US currency came under pressure after calls in April from the Group of Seven economic powers for appreciation in Asian currencies sparked speculation that Washington wants a weaker dollar to stem the ballooning US current deficit.
The yen shrugged off news that Moody's Investors Service upgraded its rating outlook on Japan's domestic debt to positive from stable due to an improving economy and fiscal reform efforts.
But the US currency was hemmed in against the yen due to options-related offers to sell the dollar from around 112.70 yen and sell offers from Japanese exporters.
Some traders said that news of an explosion at a chemical plant in northern England prompted selling in sterling in early trade, dragging the euro down too.
A police spokesman said in a recorded statement that the blast - in which there were no reported deaths - had taken place shortly after midnight at an ammonia plant. He added that there were "no off site implications at this time".
The euro slipped to $1.2775 from around $1.2810 in late US trade on Wednesday. Sterling fell to $1.8665 from $1.8697. The dollar was little changed at 112.60 yen.
For further clues about the Fed's stance on rates the market was focusing on the US nonfarm payrolls report due on Friday, which will give an update on the strength of the US labour market.
The Fed, which has raised rates 16 times in a row since mid-2004 to 5 percent, is seen in a difficult position of having to weigh the risk for higher inflation against concern over a slowdown in the housing sector. The Fed is slated to hold its next policy meeting on June 28-29.
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