The dollar surrendered early gains on Wednesday, after testimony from Federal Reserve Chairman Alan Greenspan failed to sustain its advance through key levels, prompting some investors to take back their bets. The euro traded up 0.9 percent at $1.2139 while the dollar eked out a 0.1 percent gain against the yen at 112.81 yen.
Earlier the dollar rose to fresh 14-month highs against the yen, strengthening to 113.72 yen. Traders said an options barrier was defended at 113.75 yen, with another at 114 yen.
The dollar had rallied broadly as the Fed chairman, in congressional testimony, signalled US interest rates would continue to rise. Higher rates tend to burnish the allure of some dollar-denominated assets such as short-term deposits.
Investors then questioned how much mileage the dollar could gain on expectations the Fed would continue to tighten, noting that weakness in the euro and yen eventually would boost the economic outlooks of Europe and Japan, making their currencies more attractive.
"We've had big speculative positions trying to be dollar long and they added more to that trade after Greenspan and got squeezed," said Mike Malpede, senior foreign exchange analyst at Refco Group in Chicago.
With interest rates expected to fall elsewhere, the United States is one of the few major economies tightening monetary policy this year, which has been spurring dollar buying for much of the year.
The Fed has raised the benchmark rate on 9 occasions since June 2004 to 3.25 percent and rates are seen reaching 4 percent by the end of 2005.
Euro zone rates have limped along at 2 percent for two years, while Japanese interest rates have been stuck near zero for even longer.
But Greenspan "said nothing new and the market is taking some short positions back", said Hugh Walsh, vice president of foreign exchange with Fortis Bank.
Until the euro/dollar breaks above $1.2250 on the upside or $1.1850 at the lower end of the range, "it will be tough to get excited," said Walsh. Sterling last traded at $1.7406 recovering from losses which saw it falling to $1.7273, a fresh 19-month low.

Sterling had been under pressure prior to Greenspan's testimony after the release of minutes from the latest meeting of the Bank of England's Monetary Policy Committee which showed a growing number of policymakers voting for a cut in UK interest rates. The pound recovered later in the day alongside most currencies against the dollar.
Elsewhere in his testimony, the Fed chairman said the US economic growth outlook was solid but warned of "significant uncertainties" such as high energy prices and "speculative fervour" in some US housing markets.
Greenspan also urged China to loosen its currency peg to the dollar, saying the country faces "very serious" risk to its economy if it does not allow the yuan to strengthen.