The dollar had earlier advanced broadly after Fitch downgraded Greece on Tuesday to below the single-A bracket for the first time in a decade, and prompted short covering in the U.S. currency and the yen.
In Asia traders had shed higher-risk and higher-yielding currencies and assets, including the euro, after ratings agency Fitch cut Greece's sovereign debt to BBB+ from A-.
The euro fell as low as $1.4665, its weakest since early November, but later reversed those losses on the view that the weak state of Greece's public finances was well known and that the move had overshot.
But European equity markets and U.S. stock futures turned higher, helping to reverse the safety flow into the U.S. dollar.
The initial reaction to the Greece downgrade was overdone, given that Greece remains protected with the European Central Bank's shield, so we see scope for a short-lived euro gain to $1.50 area, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
But our 12-month view is that the euro will slip to $1.35 because longer-term Greece is still left with a large deficit and a need to reduce it. It's like a slow-motion car crash, Hardman said.
ECB Governing Council member Axel Weber said on Tuesday there was no need for external financial handouts for Greece.
Sterling slid to a near two-month low against the dollar, meanwhile, in the run-up to the UK government's pre-budget report due at 1230 GMT, which was expected to highlight Britain's dire fiscal position.
At 1215 GMT (7:15 a.m. EST) the euro was up a third of a percent on the day at $1.4745.
The dollar index .DXY, which tracks its performance against a currency basket, was down 0.4 percent at 75.99, having earlier risen as high as 76.331, its strongest since early November.
STERLING IN FOCUS
Sterling was last up 0.25 percent at $1.6332, recovering from a low of $1.6167 earlier on Wednesday, its weakest since mid-October.
In his pre-budget report, UK Finance Minister Alistair Darling is expected to raise his forecast for government borrowing from an already record 175 billion pounds this year as he admits the recession has turned out to be deeper than forecast in April.
More public borrowing may raise concerns about the possibility Britain may lose its triple-A rating if the country does not act to repair the state of its finances soon.
Sterling will take its cue from the long end of the gilt curve; any increase in issuance beyond expectations would provoke a long end sell off, weighing negatively on sterling, said RBC Capital Markets in a research note on Wednesday.
With concerns about Greece and anxiety surrounding the health of Dubai's financial sector, risk demand remained low. This pushed up the yen, which tends to benefit from low risk appetite.
The dollar fell 0.5 percent on the day to 87.90 yen, edging closer to a 14-year low of 84.82 yen hit late last month, when fears over Dubai's debt problems prompted investors to cut carry trades and risk exposure.
Market participants said gains in the yen were triggered by selling in euro/yen, which fell as low as 128.82 yen according to Reuters data, its weakest in nearly two weeks.
The yen rose even as data on Wednesday showed Japan's economy grew 0.3 percent in the third quarter, sharply less than a preliminary estimate.