The dollar edged higher against the euro Thursday, as dealers cut bets against the U.S. currency a day ahead of the U.S. jobs report for January that may shed light on how close the economy is to recession.
The greenback tumbled Wednesday after the Federal Reserve again cut its benchmark interest rate, this time by a half-percentage point. Over the past nine days, the U.S. central bank has cut rates by 1.25 percentage points.
Dealers began taking profits on that move overnight, with fears growing that a credit crisis that began in the United States is now growing overseas, muddying the near-term direction for the dollar.
"There's quite a bit of indecision right now. It's not an easy market to trade," said Jeff Sakamoto, interbank trader at Union Bank of California in Los Angeles.
For now, that likely lends support to the dollar, since uncertainty keeps investors wary of taking on too much risk, said Samarjit Shankar, a Boston-based global foreign exchange strategist at Bank of New York Mellon.
By midafternoon, the euro had slipped 0.2 percent from late Wednesday to $1.4845, off an overnight peak of $1.4914, according to Reuters data. The all-time high is a little more than a cent away at $1.4966.
The greenback was little changed at 106.42 yen, moving in lock-step with U.S. stock indexes.
Versus the yen, the euro was down 0.2 percent at 158.05 yen.
The dollar also hit an all-time low of 1.0759 Swiss francs before recovering to around 1.0838 francs, little changed from late Wednesday.
The euro was down 0.1 percent to 1.6090 francs.
"We're primarily trading off of risk aversion and the view that the credit crisis may be spreading, so that's causing carry trades to unwind and putting pressure on European currencies," said Michael Malpede, senior currency strategist with Man Global Research in Chicago.
"There's the perception that the Fed is getting ahead of the curve on the economy and Europeans may be lagging a bit. ...We may be getting to the bottom of our crisis and they may be just about to confront theirs," he said.
U.S. Jobs in Spotlight
Dealers remained cautious ahead of Friday's monthly U.S. employment report. Economists expect the economy to have added 63,000 jobs in January after creating only 18,000 jobs in December, but weekly jobless data on Thursday that showed the biggest spike in more than two years kept traders guessing.
A jobs report that beats expectations would likely boost yield-seeking trades such as buying the euro and Australian dollar against the low-yielding yen, Sakamoto said.
It would not necessarily be good news for the dollar, though, given that the Fed has slashed its benchmark lending rate by 2.25 percentage points since September.
At 3 percent, the federal funds rate is the lowest among developed countries save Japan and Switzerland, and the Fed warned that more cuts may be needed to boost the economy.
Provided investors are willing to take risks, lower interest rates would reduce the appeal of keeping assets denominated in dollars.
Still, the situation in Europe was hardly better. Euro-zone inflation rose to an all-time high in January while economic sentiment plunged to two-year lows, setting up a scenario of stagflation, one of the biggest banes for investors.
"Euro bullish investors rely on the ECB not to cut interest rates early, but the longer the ECB fights inflation, the darker the European growth outlook becomes," strategists with BNP Paribas said in a note. "Hence, the euro has little long-term support and is facing increasing downside risks."