The euro dipped to a one-week low against the dollar on Thursday on profit-taking after a huge injection of cash by the European Central Bank, with further losses likely due to concerns about debt and a fragile eurozone economy.
The dollar gained support after US Federal Reserve Chairman Ben Bernanke on Wednesday gave no signal the central bank would undertake further bond purchases.
Attention on Thursday turned to a European Union summit and a meeting of euro zone finance ministers to discuss Greece's progress on meeting the terms of its bailout, which analysts said may highlight the risks of Greece struggling to complete the deal before a tight March 20 deadline.
The euro was at $1.3339, having hit a low of $1.3305. It hit a high of $1.3486 on Wednesday in anticipation of the ECB offer of cheap loans.
Traders reported early euro selling by Asian central banks and macro funds, with many cutting euro positions as the ECB's injection of 530 billion euros in three-year funds had been broadly priced in.
"The LTRO (long-term refinancing operation) brings us back to the situation earlier this year when the euro was considered the funding currency of choice,» said Valentin Marinov, currency strategist at Citi.
"Some of the euro's underperformance, especially against the commodity currencies, is here to stay. Any rebound feels like it will be sold into unless there is a sustained improvement in euro zone fundamentals."
The euro held above its 100-day moving average at $1.3293, but traders said a fall below there could push it towards $1.32.
PMI data on Thursday showed the euro zone's manufacturing sector contracted for the seventh straight month in February. In Greece, it shrank at its fastest rate in at least 13 years.
But any euro falls are likely to be tempered by factors such as oil exporters converting their dollar revenues into euros and by the fact that market participants remain very short of euros, leaving room for short-covering euro rallies, Marinov said.
Morgan Stanley analysts were more upbeat on the euro's immediate prospects, raising their end-March euro/dollar forecast to $1.32 from $1.27. They still expect the euro to decline sharply by the end of the year, though now see it at $1.19 rather than $1.15.
The dollar stood at 78.739 against a basket of currencies .DXY, above a three-month low of 78.095 hit on Wednesday as it recovered after Bernanke's testimony, although he gave a tempered view of the US recovery.
"It's not like Bernanke has dropped the idea of QE3. Yesterday we saw a bit of profit-taking but I don't think the dollar's downtrend is over,» said a trader at a Japanese bank in Tokyo.
The dollar was down 0.2 percent against the yen at 81.06 yen, hurt by profit-taking but staying close to a nine-month high of 81.661 yen hit on Monday.
Many market players say the US currency could break above that high, even if the pace of its rally slows after a 6.5 percent gain last month, as the yen could remain under pressure after Bank of Japan easing measures.
"In Japan, we still have deflation. There's room for the BOJ to do more. You should buy the dollar if it falls below 80 yen,» said another Japanese bank trader.
Data from Japan's Ministry of Finance showed foreign investors were net seller of yen bills last week, suggesting they were still not ready to park their funds in the yen.
The Australian dollar rose 0.25 percent to $1.0757, helped by robust Chinese PMI data, though it was well below a seven-month peak of $1.0857 hit on Wednesday. [Reuters]