The dollar retreated on Wednesday as dealers cashed in on the currency's jump the previous session to 2008 highs against a basket of currencies while hawkish rhetoric from a European Central Bank policymaker lifted the euro.
The euro was already in recovery mode from Tuesday's six-month low set after a report showed the Ifo index of German business confidence slumping to a three-year low.
It got a further shot in the arm when European Central Bank Executive Board member Axel Weber said any talk about lower interest rates in the euro zone is premature. Click on for more on this story.
A rebound in oil prices, as well as persistent concern about the US economy and banking system, had earlier also helped dent sentiment on the dollar and trigger the bout of profit-taking. "There's a suggestion that the dollar's recovery has come too far, too fast," said Chris Turner, head of FX strategy at ING.
"People are a bit in shock at the speed of the move in the dollar and short-term yield spreads don't justify the extent of the euro's fall." At 1113 GMT the euro was up 0.7 percent on the day at $1.4750, bouncing back from a six-month low of $1.4570 reached in the previous session on trading platform EBS.
The dollar index, a measure of the greenback's value against six major currencies, fell 0.7 percent on the day to 76.73, having hit a 2008 high on Tuesday at 77.619.
Sterling rose 0.35 percent to $1.8463, after slumping to a two-year trough of $1.8330 on Tuesday, though it fell to a 12-year low on a trade weighted basis after falling against the euro. The dollar fell 0.7 percent against the yen to 108.81 yen.
Weber's comments surprised markets. A batch of weak eurozone economic data had fuelled expectations that the European Central Bank's next move would be to cut rates, contributing to a 15-cent fall in the single currency since its peak in July.
The US Federal Reserve, by contrast, was seen as tightening policy but minutes of the Federal Reserve's last Open Market Committee meeting also hinted weak financial conditions and growth would see interest rates on hold for some time.
A more than $1 increase in oil prices to above $117, in part supported by fears that Tropical Storm Gustav may threaten oil facilities in the Gulf of Mexico, also reinforced dollar selling on Wednesday.
The dollar and oil tend to be inversely correlated. High oil prices hit the US consumer, whose spending accounts for some 70 percent of the US economy. But the dollar is expected to be broadly supported by global economic deterioration even as the Fed seems likely to keep rates on hold in the coming months.
Other central banks in the eurozone, Britain, Australia and New Zealand are expected to lower rates at some stage in order to shield their economies from the threat of recession. Analysts think the Fed is likely to raise US interest rates by around 50 basis points from the current 2.0 percent by next August.
Still, the fragile US banking system remains a concern for investors. The Federal Deposit Insurance Corporation (FDIC) said on Tuesday that more banks than at any time since 2003 might go to the wall, and the Wall Street Journal reported that the FDIC might have to tap Treasury funds to see it through the expected wave of bank failures. See and.
US durable goods orders for July are due at 1230 GMT and Overall August German inflation figures will be released later. "The consensus view for flat US durable goods orders in July and a contraction in core demand, albeit after strong June figures, suggest that the USD will remain under pressure in the afternoon," said Calyon in a note to clients.