The dollar trimmed losses on Wednesday in choppy trading, after a much anticipated US Treasury report on currency practices said China was not a currency manipulator.
The US currency earlier tumbled to fresh one-year lows against the euro and eight-month lows against the yen, as the Federal Reserve policy statement accompanying its interest rate hike failed to alter the market's view the central bank is nearing the end of its tightening cycle.
Analysts viewed the Treasury's report as slightly positive for the dollar especially against Asian currencies such as the yen, which is a proxy for China's yuan currency.
"Dollar/yen popped up 20-30 (pips), which is pretty much as expected and within the range of the day's volatility," said Michael Jansen, currency strategist at National Australia Bank.
"The key element here is that the US government has to be a little careful about what it says. In calling China a manipulator, we would probably lose progress, rather than make progress," he added.
The dollar rose to 110.42 yen after the Treasury report, trimming its losses after hitting an eight-month low around 110.11 yen just before the report. Still, the dollar was down around 0.5 percent against the yen on the day.
US Treasury Secretary John Snow said in a statement on Wednesday that the Bush administration was "extremely dissatisfied" with the slow pace at which China was adopting a more flexible currency regime.
Analysts said the Treasury report did not ease protectionist sentiment in Congress and that the US legislature would probably go ahead with punitive bills on China.
Rebecca Patterson, a senior currency strategist at J.P. Morgan in New York, said the report does not preclude the approval of dollar-negative protectionist bills in Congress.
"Protectionist sentiment is still there. I think Treasury went as far as they could without actually naming China a manipulator. That was their whole goal," she said.
In the statement accompanying the Fed's quarter-percentage-point rate hike, the Federal Open Market Committee said it may need to raise rates further to keep inflation down, although further tightening would increasingly depend on the economy's outlook.
The dollar jumped after the Fed lifted rates to 5 percent as markets initially viewed the Fed's statement as slightly more hawkish than expected. The dollar's rally, however, quickly faded as bearish sentiment on the currency persisted.
The euro wiped out its losses and surged to $1.2838, up from a $1.2751 post-Fed low, its highest in a year and up from around $1.2800 just before the Fed's decision and statement. By late afternoon, the euro pared gains to trade at $1.2782, up 0.2 percent from late on Tuesday.
The dollar also slipped to one-year lows against the Swiss franc at 1.2128 francs, before trading back up to $1.2185.
Chances of another US interest rate increase in June initially jumped as high as 50 percent after the FOMC statement, from 34 percent shortly before the policy-making body's meeting - before easing back to around 42 percent.