The dollar clawed back some losses while the euro slipped on Wednesday after an apparent lack of consensus about a eurozone rescue fund highlighted ongoing uncertainty about how to solve the region's debt problems. Comments from a German government source that Berlin opposed the EFSF rescue fund buying bonds from eurozone countries helped to pull the euro back from a near three-month high hit against the dollar in earlier trade.
A ratings downgrade of Irish government debt by ratings agency Standard and Poor's also underlined fundamental weakness in some eurozone countries, prompting short-term speculators to sell the single currency. "The euro is selling off further on this," said a trader in London, referring to Germany's resistance to the bond buying.
While this helped the dollar to recover from a 12-week low hit against a currency basket in early trade, it remained on the back foot after solid manufacturing data this week, low US yields and stimulative US monetary policy pushed investors towards riskier assets. "The greenback is suffering on the back of the Fed's ultra loose monetary policy and is being used as a funding currency as the markets load up on risky assets," said Michael Hewson, analyst at CMC Markets.
The dollar index was flat on the day at 77.100, recovering from a slide to 76.881, its lowest since early November. Its fall had stalled above significant trendline support from the all-time lows hit in March 2008 at 76.50. Data on Tuesday showed the US manufacturing sector grew at its fastest pace last month since 2004.
But unlike in 2004, when the Federal Reserve started pushing up interest rates, the US central bank is still committed to a stimulative policy and a Fed official said another round of bond purchases could be discussed at the Fed's next policy meeting in mid-March if the recovery flags. The euro slipped 0.2 percent to a session low around $1.3790, retreating after climbing to $1.3862, its highest since early November.
Next key resistance was the 76.4 percent retracement of the euro's November to January fall around $1.3950, coinciding with the 200-week moving average at $1.3956. Overall, the dollar suffered broadly, hitting a three-month low versus sterling on upbeat UK data and hawkish central bank comments, and hovered near a record low versus the Swiss franc. Against the yen, it was at 81.50 yen, not far from around 81.30 yen hit in earlier trade, roughly matching a one-month low hit the previous day.