The dollar stabilised on Wednesday as investors sought clues on the US interest rate outlook after the devastation wrought by Hurricane Katrina raised concerns about economic growth.
Some market participants say the dollar could retreat in the lead-up to the Federal Reserve's meeting on September 20 given concerns the central bank might pause in its year-long campaign of raising rates.
Such expectations rose particularly after the OECD advised the Fed on Tuesday to ease the pace of interest rate hikes in the wake of Katrina.
The market will now take a close look at the Fed's Beige Book, which outlines national business conditions, and a speech by Chicago Fed President Michael Moskow later in the day.
"Much of the dollar's move is coming from uncertainty as to what is going to happen with the Fed. There is speculation the Fed can pause, or they will raise rates but release a fairly dovish statement, putting rate hikes after September in doubt," Johan Javeus, currency strategist at SEB in Stockholm.
"The market hasn't got a clue so there is a lot of anticipation for the speech by Moskow as to how the Fed views the effect from the hurricane and oil prices."
The dollar had fallen to $1.2536, within striking distance of last week's 3-month low of $1.2589, before erasing losses to $1.2464 by 1140 GMT, steady on the day.
It was up 0.25 percent versus the oil-sensitive yen at 109.88 yen. The euro rose 0.3 percent to 137.01 yen.
The Fed has hiked rates at 10 straight meetings since June 2004, raising its funds rate to 3.5 percent from 1 percent and helping to push the dollar broadly higher in the first half of the year.
US Treasury Secretary John Snow said on Tuesday that costlier fuel prices and damage to businesses following Hurricane Katrina could slow US economic growth by around half a percentage point over the rest of this year.
However, he said that the economic stimulus from rebuilding efforts in the wake of Katrina would likely boost gross domestic product in 2006.
"There is a good chance that the Fed won't raise rates on September 20 but in doing so they are likely to reaffirm that they will raise rates thereafter," said Ian Gunner, head of foreign exchange research at Mellon Bank.
The yen failed to make headway before Sunday's general election and on concerns that Japan's export-orientated economy could suffer if US consumer demand weakens.
Elsewhere, the Reserve Bank of Australia kept rates at 5.5 percent on Wednesday as expected.