The dollar strengthened broadly on Thursday as dealers, frustrated at the euro's failure to reach a fresh new record high against the greenback, bought the U.S. currency back across the board.
Traders reported no obvious trigger for the move, and instead pointed to factors such as the euro stalling ahead of $1.3670, the dollar's break of technical resistance against the yen, the sharp slide in the New Zealand dollar and general profit-taking ahead of the weekend.
The dollar had sunk to multi-year lows on Wednesday as investors grew increasingly gloomy on the U.S. economic outlook, in contrast to the more buoyant economic prospects in the euro zone and elsewhere.
Broad-based optimism on the euro zone economy and expectations of higher interest rates lifted the euro to a fresh peak against the yen. But traders let up on the dollar selling, paving the way for a relief rally led in large part by heavy selling of the New Zealand dollar.
"The Kiwi is leading this. That was the first to go .. but it's broad dollar buying. We're not making new tops (in the euro), so it's just coming off. People are getting a bit fed up, it's the end of the week so we're seeing a bit of profit taking," said a trader in London.
The euro was down 0.2% on the day at $1.3615, having come within a whisker of its $1.3670 record high on Wednesday.
The New Zealand dollar was down 1% on the day at $0.7393 , sliding sharply after the central bank raised interest rates by a quarter of a point to 7.75% on Thursday but warned that the currency was "unjustified" at exceptionally high levels.
Some people took this as a veiled warning of possible intervention from the Reserve Bank of New Zealand.
"All the ducks have now been lined up and the RBNZ has loaded the cannon (for intervention)," Greg Gibbs, currency strategist at ABN Amro said in a research note.
The New Zealand dollar last week hit a 22-year peak of $0.7493.
U.S. Still Seen Underperforming
Meanwhile, the dollar rose as high as 119.28 yen on Thursday, up 0.5% on the day and up through the 100-day moving average around 119.05 yen, while the euro hit a new record high against the Japanese currency of 162.55 yen before easing back to 162.25 yen.
Sterling fell back below $2.00, down 0.2% on the day.
The dollar had fallen to a record low on Wednesday against a trade-weighted basket of major world currencies calculated by the Federal Reserve, the weakest level since the collapse of the Bretton Woods fixed exchange rate system in 1973.
The yen hit a record low versus the euro and falls against the dollar on Thursday, as risk-seeking investors piled into yen-funded carry trades.
Strong equity markets underpinned risk appetite, putting more pressure on the low-yielding yen, which is used to fund risky carry trade purchases of higher return currencies.
"The backdrop is still pretty good. Risk appetite is pretty strong, equity market is high...So at the moment the yen is on the back foot again," said Daragh Maher, senior currency strategist at Calyon.
"We need something really juicy in terms of a fundamental driver to get euro/dollar to a new all-time high," he said.
Such an impetus could come from U.S. first quarter growth data on Friday, where a weak reading would underline the contrast with a buoyant euro zone economy.
"We've been testing the top side in euro/dollar, but we haven't really made it. I think we need to see some positions flushed out of the market before we can see that push to the topside," said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation.