The dollar bounced back from a 14-month low against a basket of currencies in volatile trading on Tuesday as policymakers in Europe and Asia commented on the greenback's decline and options-related buying kept it from pushing though key levels.
Concern about U.S. currency weakness prompted the Bank of Canada to leave interest rates at record lows, driving the U.S. dollar up more than 2 percent against its Canadian counterpart.
Wall Street .SPX also fell as weak U.S. inflation and housing data offset strong quarterly earnings, denting investor appetite to sell the low-yielding dollar in favor of higher-yielding currencies more closely correlated with economic recovery.
The dollar has been under sustained pressure this year as investors brace for record low U.S. interest rates to last well into 2010 and questions mount about its status as the world's main reserve currency.
The market was long overdue for a correction, but we'll have to wait a few days to see if there's any follow-through from this, said Steven Butler, head of FX trading at Scotia Capital in Toronto. If the euro gets back to $1.48, that's probably still an opportunity to buy it at better levels.
An index that measures the dollar against six other major currencies recovered from a 14-month low at 75.103 and was last little changed at 75.532 .DXY. The euro, the biggest component in that basket, was off 0.2 percent at $1.4931 after failing to take out options barriers at $1.50. It earlier hit a 14-month high of $1.4994.
The dollar earlier fell as low as 90.08 yen but recovered to 91.07 yen, up 0.5 percent from late on Monday, with the critical dollar/yen support level for investors at 90.0. The dollar was last at 90.70 yen, up 0.1 percent on the day.
The U.S. dollar rose more than 2 percent against the Canadian dollar to a session peak of C$1.0526 after the Bank of Canada kept interest rates at 0.25 percent and said Canadian dollar strength more than fully offset favorable economic developments. Just last week, the dollar fell to a 15-month low near C$1.02. It last traded up 2 percent at C$1.0491.
Recent dollar weakness has also unnerved European and Asian officials, who fear their own currencies' strength will undermine economic recovery. Henri Guaino, a top adviser to French President Nicolas Sarkozy, on Tuesday said a euro at $1.50 is a disaster for European industry and the economy.
There are also growing signs that China is concerned about the domestic implications of its yuan currency peg. The yuan rose against the dollar in the non-deliverable forwards market after Market News International quoted an unnamed Chinese government source calling for a reversal of the dollar slide.
But until the market hears stronger rhetoric from the likes of European Central Bank President Jean-Claude Trichet, low U.S. rates, coupled with rising asset and commodity prices, will probably continue to weigh on the dollar, analysts say.
It's one thing to say you want the dollar to stop weakening, it's another to put your money where your mouth is, said Peter Frank, senior strategist at Societe Generale in London. The market isn't there yet, and won't take notice until it hears this kind of commentary more and from higher-ranking officials.
Sterling fell near a session low against the dollar on Tuesday after Bank of England Governor Mervyn King said that Britain is likely to return to positive growth in the second half of this year, but output will remain below its year-ago level for some time.
Sterling was last down 0.3 percent at $1.6367, still near the low on the day of $1.6330, according to Reuters data.
The Australian dollar climbed as far as $0.9310 after minutes from the October 6 Reserve Bank of Australia meeting said it may be imprudent to keep rates very low. But the currency later retreated and fell 0.6 percent to $0.9230 amid general dollar buying.
(Additional reporting by Steven C. Johnson in New York and Jamie McGeever in London; Editing by James Dalgleish)