The dollar traded near six-week highs against the euro and a three-month peak against the yen on Tuesday as traders further trimmed expectations of a Federal Reserve interest rate cut this year. Unexpectedly resilient US economic data has prompted investors to scale back the implied chances of a Fed easing this year to around 70 percent from 100 percent at the beginning of the year.
"People are to an extent unwinding expectations of a Fed rate cut, but we are really in a consolidation phase," David Watt, senior currency strategist at RBC Capital Markets in Toronto. "The US dollar sell-off had been pretty strong and people are stepping back, and there hasn't been any fresh reason to go long euro," he added.
In late afternoon trading, the euro was 0.1 percent lower from late Monday at $1.3449, well below a record peak above $1.3680 seen last month. It fell as far as $1.3436 on electronic trading system EBS on Monday, the lowest since early April.
Investors also focused on the first day of a two-day meeting between US Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi in Washington. Paulson warned the Chinese delegation Washington was growing increasingly impatient for Beijing to speed up policy changes that would help narrow the record US trade deficit.
The United States argues that an undervalued yuan currency gives China an unfair trade advantage and is a key driver of the deficit. Analysts said the talks will be closely watched for any signs China is willing to let its currency strengthen more rapidly after last week's widening of the yuan's daily trading band against the dollar to 0.5 percent from 0.3 percent.
In other currency pairs, the dollar slipped against the Swiss franc to 1.2291 francs, down around 0.1 percent on the day, after a report quoted Swiss National Bank President Jean-Pierre Roth saying the central bank must be "particularly vigilant" on the inflation risk posed by the franc.
The euro, which on Monday rose to its highest since August 1998 against the franc, tumbled to an intraday low of 1.6534, before trading back up to 1.6541. The euro has fallen more than two cents from its record high against the greenback as speculators reduced bets on a further strengthening in the euro zone currency, which had swelled to a record high last week by one industry measure.
In fact, euro long positions have become so extended that even an unexpectedly strong reading in the ZEW survey of German investors sentiment, which rose to an eight-month high in April, failed to give the currency a boost on Tuesday.
Still, analysts still expect the euro to trade higher. "Given the data flow, we still see the euro higher over time once traders and investors have worked past the positioning overhang," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.
"In fact, Eurozone data has remained consistently upbeat, despite the euro's inability to advance in the past couple of weeks," he added. The dollar was slightly up on the day at 121.55 yen, within sight of a three-month high of 121.63 hit on Monday.
Meanwhile, the Canadian dollar, the biggest gainer in recent sessions, was down around 0.1 percent at C$1.0859 to the US dollar, not far off a 29-1/2-year high. The Canadian currency has rallied for almost three months, driven by solid commodities prices, robust economic data and acquisitions of Canadian companies.