The dollar slipped on Thursday ahead of what is widely expected to be a rate rise by the European Central Bank later in the day as investors waited to see if it would suggest rates had further to climb.
The dollar relinquished gains, prodded lower after the People's Bank of China said in its 2006 financial stability report that the US currency could slide if investors shunned dollar-denominated assets due to the growing US trade deficit.
Overall, investors mostly stuck to the sidelines, awaiting signs from ECB President Jean-Claude Trichet that rates may keep rising in 2007 after an expected rise to 3.5 percent.
The market was also focused on US employment data for November due on Friday. "The market is waiting for the ECB later today and also US jobs data," said Junya Tanase, a currency strategist at J.P. Morgan Chase Bank.
The dollar hovered near 20-month lows against the euro and a four-month trough against the yen even after surprisingly strong US data on employment and service sector growth offset other figures showing a contraction in manufacturing activity.
A run of weak economic data has investors bracing for the Federal Reserve to cut interest rates from the current 5.25 percent as many as three times next year, even as Fed officials have indicated they are still worried about price pressures.
Such cuts would erode the dollar's yield advantage, especially with other central banks apparently poised to keep tightening monetary policy. The dollar dipped to around 114.90 yen down 0.25 percent and sliding closer to a four-month low of 114.43 yen struck on Tuesday.
The US currency reversed gains made on Wednesday on data showing solid growth in US private-sector jobs, which could boost the chances for a strong payrolls report later in the week.
The euro slipped to 152.90 yen from 153.15 yen, partly on selling by Japanese investors, traders said. The single European currency inched up to 1.330 hovering just below a 20-month peak of $1.3370.
Sterling was up a touch at $1.9680 heading into a Bank of England policy meeting later in the session at which the central bank is seen keeping rates at 5.0 percent. It hit a 14-year high of $1.9849 last week.
The Australian dollar surged after data showed jobs growth of 36,200 in November, more than three times as much as forecast and reinforcing expectations that the country's central bank will keep a bias towards tightening policy. The Aussie gained 0.5 percent to $0.7885 pushing back towards a 20-month peak of $0.7926 touched last week.
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