The dollar teetered close to its all-time lows against the euro on Thursday as the market waited to see whether the European Central Bank would voice concern about the sharp rally in the single currency.
The ECB is widely expected to announce no change in its 4.0 percent interest rate later on Thursday, so all eyes will be on what President Jean-Claude Trichet says about the conflicting challenges of euro strength and a jump in inflation.
Meanwhile investors remained perturbed by expectations that the Federal Reserve could cut rates again next month, further reducing the dollar's yield appeal, with stock futures already pointing to a weak start on Wall Street.
On Wednesday, Morgan Stanley said it took a $3.7 billion loss from its subprime mortgage exposure. And General Motors Corp reported its biggest ever quarterly net loss of $39 billion, adding to fears the U.S.'s credit problems could be spreading to the wider economy and hurting growth.
That drip feed of bad news for the dollar is likely to continue right through the Christmas and New Year period, said Adam Myers, market strategist at Credit Suisse.
We are expecting Trichet to remain very hawkish ... so what we should see euro/dollar touching a new high this afternoon, he added.
The dollar index, which measures its value against a basket of six major currencies, was down 0.2 percent at 75.456, off its record low of 75.077.
By 7:07 a.m. EST, the euro was up 0.1 percent at $1.4662, after surging to an all-time high of $1.4730 on Wednesday according to Reuters data.
SWORD OF DAMOCLES
One-week implied euro/dollar volatility surged to a 2-1/2 year high of 10.1 percent. One-month and one-year vols were at their highest since the peaks set in mid-August at the height of the credit market crunch.
The strength of the euro -- which has gained more than 11 percent versus the dollar since the start of the year -- is increasingly hurting European exporters.
Louis Gallois, chief executive of Airbus maker EADS described the euro's slide versus the dollar as a Sword of Damocles hanging over the French company, saying it will force a new round of cost-cutting.
EADS' main rival is U.S.-based Boeing, whose prices are now looking much more competitive thanks to the weak dollar.
Although we remain euro/dollar bullish longer term, the risk is a pull-back today as the ECB suggests the exchange rate is back on the policy radar, RBC Capital Markets said in a client note.
The ECB decision is due at 7:45 a.m. EST, followed by Trichet's news conference at 8:30 a.m. EST.
The Bank of England left rates on hold at 5.75 percent on Thursday. Although the decision was in line with expectations, it gave sterling a boost as a minority of investors had been positioned for a rate cut.
Sterling rallied to a fresh 26-year high at $2.1088 after the BoE decision.
(Additional reporting by Meg Clothier)