The dollar edged up on Wednesday after a Federal Reserve official said that interest rates will eventually need to be raised, highlighting that the Fed may be done relaxing policy after its aggressive run of rate slashes.
Kansas City Fed President Thomas Hoenig said late on Tuesday that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, helping the dollar against the euro.
The dollar has rebounded and hit a two-month high against a basket of currencies last week as investors believe the Fed is set to keep rates on hold in coming months after having trimmed them to 2 percent last week.
In contrast, the European Central Bank is facing mounting signs of a slowing euro zone economy that has prompted market players to think a rate cut could yet be on the cards.
The higher-yielding Australian and New Zealand dollars dipped as some traders booked profits on their rise against the yen to near two-month peaks as waning worries about the credit crisis have boosted global stocks.
Asian equity markets got a boost from the rise on Wall Street after officials of top US mortgage financing company Fannie Mae said they were cautiously optimistic that the worst of the credit crisis had passed even after posting a $2.2 billion quarterly loss.
US Treasury Secretary Henry Paulson told the Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on US home mortgages.
Japan's Nikkei average rose nearly 1 percent to its highest in nearly four months as the country's financial markets reopened after a four-day break.
"The market is going to be focused less on the financial crisis than on an economic slowdown, reading the tea leaves of the data," said Sean McGoldrick, head of FX trading in Tokyo at Morgan Stanley.
The dollar was little changed at 104.81 yen slipping from an early high of 104.97 yen in subdued trade.
When stocks rise, the low-yielding yen is often used as a cheap source of funds to buy higher-yielding currencies in the carry trade. Expectations that the Bank of Japan's will keep rates at the low 0.5 percent in the months ahead also encouraged carry trades, traders said.
But Japanese exporters had orders to sell the dollar around 105.30 yen as part of their regular repatriation of overseas earnings, potentially limiting any dollar gains for now, traders said.
The euro slipped 0.2 percent to $1.5494 down from a high of $1.5595 on Tuesday and near the five-week low of $1.5360 struck last Friday after U.S. data showed companies cutting fewer workers than expected in April.
The payrolls figures convinced more investors that the Fed may be done cutting rates after slashing them aggressively from 5.25 percent since last September.
The single European currency dipped 0.1 percent to 162.40 yen.
The dollar has slipped this week on the jump in oil prices to record peaks above $122 a barrel which is seen as a negative for the currency. Oil was little changed at $121.79.
Typically the dollar moves in the opposite direction of oil and gold prices, while the steep cost of crude is also seen prompting Middle East producers to shift some of the dollar-based windfall into other currencies.
The Aussie edged down 0.1 percent to 99.28 yen but was just below the two-month peak near 99.70 yen hit on Monday. - Reuters