The euro edged off a two-week low on Tuesday but lacked momentum after a drubbing the previous day when weak German industrial data further dampened expectations for a near-term eurozone rate hike. But with more Asian market players returning from Lunar New Year holidays, traders remained wary of more potential euro buying by Asian central banks after they helped push the euro higher on Monday.
Such speculation helped to lift the euro to $1.3623, up 0.3 percent from late US levels and more than a full cent above a two-week low of $1.3508 hit on Monday. Surprisingly weak German industrial orders data for December had triggered selling of the euro, although analysts said the soft figures partly reflected a strong reading in November.
But the single currency was holding above major supports, including $1.3535, which had been a key resistance level in late January and is its 100-day moving average, as well as $1.3480, a 38.2 percent retracement of its January-February rally.
Last week, the euro started descending from a 12-week high of $1.3862 after European Central Bank President Jean-Claude Trichet doused expectations for an imminent rate increase, saying inflation would remain contained. That was followed by an unexpected fall in the US jobless rate, which sparked a rise in US debt yields, further helping the dollar against the euro.
The 10-year US yield broke above a trading range that had been in place since early December and US money markets have started to price in some chance of a US rate hike later this year. Still, traders are reluctant to buy the dollar aggressively after Federal Reserve Chairman Ben Bernanke said last week that the US economy still needs the Fed's help - a stance many traders expect him to repeat when he speaks on Wednesday.
One currency that is benefiting from expectations of an early rate hike is the British pound, as chances of an early rate hike still smouldered ahead of the Bank of England's policy announcement on Thursday. The pound ticked up 0.2 percent in Asian trade to $1.6143, about 0.8 percent below a three-month high of $1.6279 hit last week. Financial markets are expecting a BoE rate hike by May, with a small chance of a hike this week priced in, but analysts' expectations are quite different with many not expecting one until the end of the year.
"As European currencies had been riding on rate hike hopes, the BoE's policy meeting will be important not just for sterling but also for the general outlook of the dollar," said Hideaki Inoue, a manager at Mitsubishi Trust and Banking. The dollar was in a holding pattern against the yen, little moved at 82.30 yen and capped by selling by Japanese exporters at 82.50 yen and above.