The dollar halted a sharp sell-off against the euro and a basket of major currencies on relief that U.S. manufacturing had not deteriorated as much as expected.
Analysts said, however, it was unlikely the greenback's recovery would be sustained given a raft of economic data this week that could reinforce fears of a U.S. recession and a steeper Federal Reserve interest rate cut this month.
"The dollar is rebounding both against the yen and the euro as a result of the less disappointing ISM number," said Omer Esiner, a foreign exchange analyst at Ruesch International in
"The number while definitely not anything to write home about did provide an excuse for traders to book some profits on the overnight losses on the dollar," he added.
Traders wary of another below-expectations economic report had pushed the euro earlier to a lifetime peak of $1.5275 according to Reuters data, but quickly started buying back the dollar when their fears did not materialize.
In late afternoon New York trade, the euro traded just a tad higher at $1.5199, while the New York Board of Trade's dollar index was flat at 73.665 after falling to a historic low of 73.354. The index tracks the dollar's performance against a basket of six currencies.
The dollar cut some losses against the yen to trade around 103.10 yen, down 0.6 percent on the day. Rising risk aversion following a drop in global stocks had earlier pushed the dollar to a three-year low of 102.62 yen.
Some traders attributed the dollar's recovery to remarks by European Central Bank chief Jean-Claude Trichet that Washington backed a strong dollar. Trichet made the remarks as he entered a meeting of euro zone finance ministers in Brussels.
Analysts said the dollar's mild recovery was likely to prove temporary, with more new U.S. economic data, particularly February's nonfarm payrolls report, still to come this week.
"The number today wasn't as bad as some feared but we still have other important readings coming this week including the payrolls report on Friday," said Kurt Karl, chief U.S. economist at Swiss Re in New York. "That report is going to be huge."
The Institute for Supply Management's index of U.S. national factory activity fell to 48.3 in February from 50.7 in January, slightly above economists' expectations for a reading of 48.0. A figure below 50 indicates contraction.
Analysts said the reading meant that an aggressive interest rate cut at the March Fed meeting could not be written off.
"It was very much a relief that it was not another major downside surprise but it shouldn't change the rate outlook significantly," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
Short-term interest rate futures showed about a 75 percent perceived chance of the Fed lowering its benchmark overnight lending rate by 75 basis points at its March 18 meeting. That
would further reduce the allure of the dollar in favor of higher-yielding currencies such as the euro or Australian and New Zealand dollars.
One hundred basis points equals one percentage point.
The benchmark fed funds target rate is currently at 3 percent after being slashed by 2.25 percentage points since mid-September. The euro zone's refinancing rate is at 4 percent
with the European Central Bank preoccupied with inflation.
The euro weakened against low-yielding currencies, hitting earlier multi-week lows at 155.95 yen and 1-1/2-year troughs at 1.5700 francs.