The dollar rose broadly Thursday after government data showed signs of resilience in the U.S. labor market, while a key consumer confidence measure in Germany plunged, weighing on the European currency.
Falling demand for the euro in the past two sessions came as the currency traded above a record $1.60 on Tuesday, its highest since its inception in 1999. Traders and investors bought the currency, betting the next move by the European Central Bank would be a hike on benchmark interest rates.
But ECB policy-makers' comments on excess volatility in euro trading combined with soft economic data this week, dampened such expectations and triggered a sell off in the currency, analysts said.
"Now that we tried and failed to stay above $1.60 in euro/dollar, it looks like we're coming back to the bottom," said Brian Dolan, head of research at consultancy Forex.com, in Bedminster, New Jersey.
"The U.S. data today is pretty clearly dollar positive and we're coming off some weaker European data."
The number of U.S. workers filing initial claims for unemployment benefits unexpectedly fell last week, the government said.
In Germany, a reading on business sentiment showed the biggest monthly fall since September 2001. The headline Ifo index fell to a much lower-than-expected 102.4 in April, its lowest since January 2006.
In midday trading in New York, the euro was down 1.5 percent at $1.5655, nearly 3 cents below Tuesday's record highs and its lowest in at least two weeks.
Upside potential in euro/dollar is now "quite limited," Manuel Oliveri, a currency analyst at UBS AG in Zurich said in a research note. The bank forecasts the pair will trade at $1.55 in one month and at $1.47 in three months.
Against the Japanese yen, the European currency was also down 0.5 percent at 163.39 yen.
Against the yen, the dollar was up 0.9 percent at 104.29 yen.
The Ifo, coupled with a slump in euro zone manufacturing PMI to near economic-contraction levels on Wednesday, suggested that the euro zone may not be immune to a U.S.-led economic slowdown.
The data poured cold water on nascent market expectations of an ECB interest rate hike this year, which have been fueled by recent hawkish comments ECB policy-makers. ECB President Jean-Claude Trichet said on Thursday that there is concern about the impact of currency fluctuations on financial stability.
"If anyone was (betting) on a rate hike sometime this year from the ECB, the Ifo would have certainly reduced the chances," said Adarsh Sinha, currency strategist at Barclays Capital in London.
The dollar was also up 1 percent against a basket of six major currencies at 72.506.
The dollar's gains come as investors look closely at whether the Federal Reserve might be ready to pause in its aggressive run of interest rate cuts after an expected quarter-percentage-point trim next week to 2.0 percent.
The U.S. central bank has slashed 3 percentage points from borrowing costs since last September in an effort to stave off recession.
A report on weak new U.S. home sales in March failed to provide lasting clues on the outlook for interest rates, analysts said.
"I don't think the market view (on the U.S. rate outlook) will change dramatically just on this number," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.