The euro retreated from a one-month high against the dollar on Tuesday, tracking a pullback in the yuan a day after China's pledge to allow its currency to trade more freely had spurred risk demand.
Upward momentum seen on Monday in the euro and higher-risk currencies, including the Australian dollar, petered out as investors acknowledged that a more flexible yuan policy would not lead to a sharp appreciation in the currency.
A moderate appreciation of the yuan will not change China's current account situation and it won't imply the end of global imbalances, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
Therefore there is no reason for a significant impact on the euro/dollar or dollar/yen, he said. It would have to be quite a large revaluation to have a lasting impact on the majors.
The yuan's daily mid-point was set at 6.7980 per dollar on Tuesday, the highest since its July 2005 revaluation, but the Chinese currency relinquished gains as big, state-owned banks heavily bought dollars.
By 1134 GMT, the euro traded at $1.2271, down 0.2 percent on the day after falling to $1.2259. The single currency pulled back from $1.2490 hit on Monday, its strongest since May 24, after failing to break into the $1.25 region.
Market participants said the euro would face more losses, but technical analysts said near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low around $1.1875 on June 7 to Monday's high.
The euro barely reacted to the German Ifo business climate index, which came in slightly higher than expected at a two-year peak in June, while the expectations index fell.
The positive surprise in the IFO index failed to change the market's negative mood. The fact that the expectations component was downbeat did not help to support the single currency, analysts at Credit Agricole CIB said in a note.
EURO ZONE WORRIES
Analysts said a ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement it was raising its estimates for loan losses for Spain's banking sector on Monday also weighed on the euro.
The single currency extended losses after Moody's Investor Services cut two Greek government sponsored ABS.
The euro fell 0.6 percent versus the yen to 111.29 yen.
The Swiss franc extended gains to a fresh all-time high against the euro after the Swiss central bank's vice chairman said the bank was not having to intervene in markets for now.
The euro fell to a low of 1.3618 francs, according to Reuters data, as an option barrier at 1.3650 franc gave away.
Traders said stops were triggered below that level and there were more barriers at 1.3600.
Sterling was off from six-week high hit against the dollar on Monday as UK finance minister George Osborne unveiled the new government's first budget, which is expected to be the tightest in decades as he pledges to tackle the deficit.
The dollar index .DXY rose 0.2 percent to 86.129, rebounding from a one-month low hit on Monday. Analysts said this suggested more gains for the greenback in the near term.
Still, the dollar was about a third of a percent weaker at 90.55 yen as the Japanese currency rose across the board.
(Additional reporting by Tamawa Desai; Editing by Stephen Nisbet, Ron Askew)