The euro was steady on Wednesday, retreating from a two-month high against the dollar set earlier as investors remained wary ahead of a widely expected quarter point interest rate hike by the European Central Bank.
Sterling fell broadly as tumbling UK housing shares and a profit warning from iconic retailer Marks and Spencer cast a further shadow over the slowing British economy.
The euro and dollar fell versus a broadly stronger Aussie dollar, which jumped after Australian retail sales soundly beat expectations in May, challenging the official view that interest rates were high enough to curb domestic demand.
However activity was relatively subdued ahead of key events - a well-flagged ECB rate rise on Thursday and ECB President Jean-Claude Trichet's post-policy news conference plus the influential US employment report also due the same day.
"It's fair to say that there has been an upward trend (for the euro) but there's a fair amount of nervousness ahead of tomorrow," said Niels Christensen, FX strategist Nordea in Copenhagen.
"The market has priced in a rate hike and isn't expecting brilliant payrolls data, so if there are no surprises, I would expect the euro to fall," adding investors will focus on the language Trichet uses in the post decision news conference for more clues on the rate outlook. At 7.25 percent, Australian interest rates stand among the highest in industrialised countries.
The dollar still looked vulnerable despite Tuesday's data from the Institute for Supply Management showing a surprise expansion in US manufacturing activity after five months of contraction.
"The dollar's failure to rally despite the firm headline ISM number shows investors are highly sceptical of the US near-term economic prospects," said UBS analysts in a report.
US Treasury Secretary Henry Paulson was quoted as saying on Wednesday the US economy faced a tough second quarter and Europe would not be immune to the impact.
Investors will closely watch June US private sector jobs numbers and May factory orders due later in the day for what they might signal about Thursday's employment data and the pace of economic growth.