LONDON: The euro edged lower on Wednesday as the dollar built on its recovery from last week's three-year lows, with higher Treasury yields supporting the greenback ahead of minutes of the Federal Reserve's most recent policy meeting.
The single currency fell 0.2 percent against the dollar after trimming some of its losses with the release of a purchasing managers' survey showing that euro zone business growth, while losing some steam, remained robust this month.
The euro, at $1.2318, is 2-1/2 cents off its Friday high as investors, sensing the dollar had been oversold, bought back into the greenback and offloaded euros.
Against a basket of currencies, the dollar was up 0.2 percent to a one-week high. The U.S. currency has gained almost 2 percent since it touched three-year lows last week, but most strategists believe the rally is only temporary amid a longer-term structural decline.
The dollar has fallen this year on the back of strong economic performance in other regions, where monetary policy is expected to tighten, and concerns the United States is facing a growing budget deficit.
The euro has been driven by dollar weakness and then the recent recovery, but investors remain long on the currency in anticipation the European Central Bank will soon begin unwinding its balance sheet.
Analysts at ING said "any corrective moves" towards $1.23 would be temporary, with economic activity in the euro zone still booming and supportive for the currency.
The focus now is on U.S. Federal Reserve minutes due later on Wednesday for hints on the future pace of U.S. monetary tightening after worries about rising inflation rattled markets in recent weeks.
"Positioning is a big part of the dollar's recovery, especially in the euro and in sterling. Speculative positioning is skewed to the long side [betting against the dollar], so it's some profit-taking and a healthy correction," said Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.
"If they do leave the door open to four (rate hikes this year), it's certainly not going to send the dollar much lower. But our view is that the Fed is not having much of a major impact on the dollar anyway," he said.
Traders are also watching this week's large U.S. government debt auctions for clues to international investors' appetite for U.S. assets.
Some of the U.S. government's short-term borrowing costs rose to their highest level in more than nine years on Tuesday as it raised $179 billion in the Treasury securities market to fund spending and make debt payments.
The yen showed a muted reaction to comments from Masatsugu Asakawa, Japan's top currency diplomat, who was quoted as saying that the yen's recent moves were "one-sided".
The dollar rose 0.2 percent to trade at 107.51 yen, helping the greenback after recent falls against the Japanese currency. The dollar earlier on Wednesday recovered to its best level since Feb. 14. Last week the dollar touched its weakest point since late 2016.
Sterling traded down 0.5 percent at $1.3927 after a surprise dip in the UK jobless rate, and ahead of testimony by Bank of England policymakers in parliament later in the day.