The dollar weakened broadly on Wednesday as dealers took profit on the currency's biggest rise in three weeks the previous session and pushed the euro back to the middle of its range of the last fortnight.
Sterling held its ground against the weak dollar but slid against the euro, as traders interpreted the minutes from the Bank of England's last policy meeting as slightly dovish.
The dollar index, a broad measure of its value against six major currencies, fell back toward the 15-month low hit on Monday as the impact of U.S. Federal Reserve Chairman Ben Bernanke's rare comments on currencies faded.
Bernanke's rare venture into dollar rhetoric on Monday, which was later echoed by other Fed officials and European Central Bank President Jean-Claude Trichet, had pushed the euro down two cents toward $1.48 on Tuesday.
But most dealers say the dollar's longer-term declining trend is intact because although the Fed may be in the very early stages of withdrawing its huge stimulus measures -- it said on Tuesday it will pare back its discount window borrowing facility -- it is still nowhere near raising interest rates.
It's unwise to ignore what he had to say. There have been quite clear signals from central bankers in developed and developing economies that further downdraft in the dollar is generally unwelcome, and that's making the market fairly cautious, said Rob Minikin, strategist at Standard Chartered.
He said the market was range trading and noted the euro's return to the middle of the $1.48-$1.51 area.
At 1040 GMT the dollar index .DXY =USD was down half a percent on the day at 75.02, after gaining 0.6 percent on Tuesday, its biggest one-day rise since Oct. 26. On Monday it struck a 15-month low of 74.679.
The euro EUR= was up half a percent at $1.4940, up more than a cent from Tuesday's intraday low of $1.4806. Dealers said the rebound meant a large $1.48-$1.51 double no touch options structure rolling off on Friday remained alive.
The dollar was down a quarter of a percent against the yen at 89.10 yen JPY=, back within sight of its one-month low of of 88.73 yen struck on Tuesday.
MPC MINUTES SHOW SPLIT
Sterling was flat on the day at $1.6807 GBP=D4, while the euro was up half a percent against the pound at 88.88 pence EURGBP=. Technical support at the 100-day moving average 88.43 pence held firm, and the euro broke back above the 200-day moving average at 88.66 pence.
The minutes of the BoE Monetary Policy Committee's Nov. 4-5 meeting showed a three-way split, with seven of its nine members votimng to expand the bank's quantitative easing programme by 25 billion pounds to 200 billion pounds.
But perhaps the biggest surprise was the discussion on potentially cutting the rate of remuneration it pays on bank reserves in the future. This could effectively serve to ease policy as it would encourage banks to lend more.
Any hopes for an MPC-related boost to sterling is gone, said Daragh Maher, deputy head of FX strategy at Calyon, adding, however, that the downside to sterling may also be limited.
The next focus for traders will be U.S. inflation data for October at 1330 GMT [ECON]. The figures may be of even more interest in light of Bernanke's comments this week on the dollar and how it relates to imported inflation and the Fed's mandate.
The Fed's relatively sanguine view on the dollar (although acknowledgement that it is an input into their monetary policy decision makings), coupled with the belief that asset prices are not forming another bubble, should provide a green light for recent trends to continue, said Lauren Rosborough, senior currency strategist at Westpac in London.
That said, some markets remain wary and on a technical basis, the 'bull' trade is not as strong as it was, she said.
Traders also digested U.S. President Barack Obama's visit to China, where he had talks with Premier Wen Jiabao on Wednesday, although few expect any near-term changes in Beijing's foreign exchange policy.