The dollar steadied on Wednesday, as the boost to the euro and the yen from worries about a possible U.S. recession following an inversion in part of the U.S. Treasury yield curve faded.
The U.S. currency fell broadly earlier this week after a thaw in trade tensions between Washington and Beijing sapped demand for the safe-haven greenback. The currency also came under pressure after the U.S. bond market sent worrisome signs about economic growth.
The difference between short-dated and long-dated U.S. Treasury yields narrowed on Tuesday as the inversion of the yield curve spread between more maturities, prompted by worries about a slowdown in U.S. economic growth.
Still, lingering uncertainty regarding China and the United States' ability to resolve their trade war provided some support to the greenback.
"The U.S. dollar is caught in the cross-currents of safe-havens flows, as global stock markets remain volatile, and investors' realignment of Fed rate hike expectations in 2019," Dean Popplewell, vice president of market analysis at OANDA in Toronto, said in a note.
On Tuesday, the futures market implied traders expect the U.S. central bank to raise interest rates at its next policy meeting, on Dec. 18-19, but they have scaled back their expectations of two rate hikes in 2019 to less than 10 per cent, down from 59 per cent a month ago.
The euro, which initially rose following a Reuters report that European Central Bank policymakers are exploring ways to withdraw stimulus in 2019, soon gave up those gains.
"Upside for the euro is perceived as limited given mounting evidence of a weakening eurozone economy which is raising an already elevated bar for the European Central Bank to lift borrowing rates from crisis lows," Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, said in a note.
Businesses across Europe hit the brakes last month as a manufacturing slowdown in the eurozone spread to its dominant service industry, while Brexit uncertainty hammered British companies, surveys showed.
"We are on the side that thinks the dollar is up for some losses as others recover, but without the fundamentals being there, like GDP and PMI expanding consistently, there is no clear end in sight for dollar dominance," said Juan Perez, a senior currency trader with Tempus Inc in Washington.
The Aussie, often viewed as a barometer of Chinese growth, had risen early in the session after China's Commerce Ministry said that a Chinese trade and economics delegation had held a successful meeting with the United States.
Sterling reversed early losses on a more positive outlook over Brexit, overcoming data showing a shocking slide in Britain's services sector and suggesting the economy would barely grow in the last quarter of 2018.
(With inputs from agencies.)