The dollar fell 1 percent versus the euro on Thursday, losing gains after a key European banking official said an improving global economy should help European exporters bear the burden of a strong euro.
European Central Bank President Jean-Claude Trichet acknowledged that the euro's recent record-breaking rally against the dollar was hurting exports from the euro zone.
But he added that growing global demand should mitigate the impact of the rise in the zone's single currency, which makes European exports more expensive.
Trichet, speaking at a news conference after the ECB held its key interest rate unchanged at 2 percent, said the price of the euro was one reason the bank decided to leave rates at historic lows.
"We have seen some expressions of concern around the edges of European policy-making circles, but the core players in Europe have taken a relatively fatalistic view on euro strength," said Daniel Katzive, currency strategist at UBS in Stamford, Connecticut.
"I think they view dollar weakness as largely inevitable and have decided to put the best face on it," he said.
Earlier on Thursday, European Union Trade Commissioner Pascal Lamy said the euro's exchange rate against the dollar was approaching a level that could be worrying for competitiveness in the 12-nation currency zone.
Earlier, the Bank of England left its key interest rate steady at 3.75 percent. The rate announcements from the BoE and the ECB were expected and did little to move the markets. But it was Trichet's comments that helped to turn the dollar from a winner into a loser on the day, traders said.
The euro has risen more than 10 percent against the dollar in the past two months, bringing its gains over the past 2 years to more than 40 percent. European business groups have warned that the euro's strength is denting growth prospects.
The euro at one point climbed as high as $1.2779, just shy of Tuesday's record high of $1.2812, before slipping back to $1.2756, up 0.94 percent on the day.
Fears of yen-selling intervention by Tokyo kept the dollar in a super-tight trading range against the yen. The dollar dropped to 106.14 yen, off 0.09 percent on the day.
A market source told Reuters on Wednesday Japan had poured three trillion yen into the currency markets in the first two days of this week alone to defend the 106 yen level.
This compares with 20 trillion yen in intervention through all of 2003, a level which was itself a record.
Traders doubted how long Japan could hold back dollar selling against the yen.
The dollar also fell more than 1.20 percent against the Swiss franc, at one point dropping as low as 1.2242 francs.
The Australian dollar rose more than 1 percent to US $0.7757. Sterling rose 0.83 percent to $1.8331.
The dollar showed little reaction to earlier news that the number of first-time US jobless claims rose to 353,000 in the week to January 3 from 339,000 a week earlier.
Economists had forecast a rise to 350,000. The four-week average declined to 350,000 claims from 355,750 the week before.
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