The dollar fell to record lows on Thursday, hit by fresh evidence that a weak housing market could crimp U.S. growth and force the Federal Reserve to cut interest rates again.
But the greenback fought back from lifetime troughs against the euro and a basket of currencies after data showed sales of new U.S. homes declined less than some investors had feared.
Investors had sold the dollar in anticipation of a dire housing number, lifting the euro to a record peak around $1.4189 and sending the dollar index to 78.159, an all-time low.
New-home sales fell 8.3 percent in August, but rumors before the report's release predicted even worse results. For details on Thursday's economic data.
There was talk that the housing decline would be sharper, so we saw a bit of a relief rally, but the number was pretty bad no matter how you cut it, said Ashraf Laidi, chief market analyst at CMC Markets in New York.
He added that we shouldn't let market reaction cloud our judgment of what these numbers mean, which if anything, is to cement the need for another 50 basis points of rate cuts this year.
The euro last traded at $1.4146, up 0.1 percent on the day, according to Reuters data. The dollar index, a gauge of the greenback's value against a basket of six major currencies, was down 0.1 percent at 78.404.
The dollar has been on the defensive since the Fed slashed interest rates by 50 basis points last week amid a deepening housing slump that many fear threatens to slow U.S. growth.
The market has been selling the dollar for a bit of time, and at various periods there will be brief moments of profit taking and position adjustments. But that's all you are going to see, said Matthew Kassel, director of foreign exchange at ING Capital Markets in New York.
Traders said the market is still convinced the Fed will cut rates again at each of its remaining two meetings in 2007, despite data showing a modest slowdown in second-quarter growth and a relatively tight labor market.
Earlier, data showed the economy grew at a revised annual rate of 3.8 percent in the second quarter, down from earlier estimates of 4 percent.
A separate report showed initial jobless claims fell steeply in the latest week. Last month, the government's jobs data showed U.S. payrolls contracted in August.
There is no sentiment change. The market is aware that we are kind of extended here now. ... There are a lot of things priced in right now, including several rate cuts by the Fed, a potential recession in the latter half of 2007 or early 2008, Kassel said.
U.S. data on personal income, consumer sentiment and Midwest area business activity on Friday could provide further clues about the strength of the economy.
The dollar rose 0.2 percent to 115.66 yen, not far from a session high of 115.88 yen. It traded near intraday highs against the Swiss franc at 1.1729.
Traders said gains in global stocks helped boost carry trades that involve using cheaply borrowed yen to buy higher-yielding currencies and assets.
The carry trade works as long as stocks go up, said Michael Malpede, senior currency strategist at Man Global Research in Chicago.
Sterling gained 0.5 percent to $2.0260.
(Additional reporting by Lucia Mutikani and Kevin Plumberg)