The US dollar edged lower versus the euro on Tuesday as minutes of the last Federal Reserve meeting showed policy makers felt that a prolonged and severe economic downturn can't be ruled out.
The dollar remained steady against the yen and a basket of currencies, though, on growing views the economic slump in the United States could spill over to other countries and prompt their central banks to cut interest rates. Those concerns appeared to be backed by data showing a sharp drop in British home prices, raising the chances the Bank of England will cut interest rates by 50 basis points at its policy meeting on Thursday.
A reluctance by traders to buy the euro aggressively in the absence of major economic data from both the United States and the euro zone, and ahead of central bank meetings on Thursday, also helped put a cap on any dollar drop, analysts said.
"There is a shift, especially on the euro side, a realisation that maybe the European economy will not be able to withstand the US slowdown," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
"The market is not yet prepared to price in cuts by the ECB. On Thursday, the ECB will probably continue to emphasise the upside effects of inflationary pressures in the economy, but ultimately it will have to move from the sidelines and cut rates before year-end."
Aggressive monetary easing by the Fed in a bid to prop up the economy following a severe downturn in the housing sector tilted the yield appeal in the euro's favour and has been the main driver behind the dollar's sell-off. Since mid-September, the Fed has lowered its benchmark overnight lending rate by 3 percentage points to 2.25 percent. The European Central Bank has kept its refinancing rate at 4 percent. In late afternoon trading in New York, the euro was 0.1 percent higher at $1.5715. Against the yen, the dollar was up 0.1 percent higher at 102.50 yen.
The New York Board of Trade's dollar index, which tracks the greenback's performance against six major currencies, climbed to a session high of 72.376, but it last traded around 72.229, nearly flat on the day.
Members of Fed's policy-setting committee worried at their most recent meeting that the housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday showed.
"The minutes are relatively dovish on interest rates and bearish on the US economy," said Dustin Reid, a senior currency strategist at ABN Amro in Chicago. "But markets have already priced that in. That's why we're seeing very little reaction."
Sterling was the biggest loser of the major currencies on Tuesday, falling nearly 1 percent to $1.9693. It dived to a record low of 78.97 pence per euro earlier. Halifax, Britain's biggest mortgage lender, said UK house prices fell 2.5 percent in March, the biggest drop since September 1992, and much steeper than the market's forecast of a 0.4 percent decline.
Traders were also awaiting Friday's meeting of Group of Seven finance ministers and central bankers, where a broad range of proposals aimed at restoring confidence in the battered banking system will likely be discussed.