The dollar and the yen gained broadly while perceived higher risk currencies came under heavy selling pressure on Wednesday as riskier assets succumbed to profit-taking after a recent strong rally.
A reassessment was sparked after U.S. data showed a slide in consumer sentiment during July, encouraging investors to take profits from the sharp risk rally that caused currencies such as the Australian dollar to surge, along with the euro.
Further jitters were sparked by sharp falls in Chinese stocks, which fell more than 5 percent at one point, partly due to concerns that Chinese banks may begin to restrict lending.
However, European shares managed to stage gains in early trade, trading up 0.4 percent, which traders said helped to limit losses in the euro and other riskier currencies.
"We have had a very strong rally in risky assets and the market has been looking for reasons to take profit. Given the levels reached, a near-term extension of the rally looked unsustainable," said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt.
"But I see this as a temporary rise in risk perception rather than the start of a new trend," he added.
At 0754 GMT, the euro fell 0.1 percent against the dollar to $1.4168 after rising as high as $1.4305 on trading platform EBS on Tuesday, its highest since early June.
The dollar index, which measures its performance against a basket of currencies, rose 0.1 percent to 78.927.
The yen gained broadly, with the euro down 0.2 percent to 133.72 yen and the dollar down 0.2 percent at 94.36 yen.
AUSSIE FALLS
The biggest mover was the Australian dollar, which surged to a 10-month high against the U.S. dollar on Tuesday following hawkish comments by Australia's central bank governor that prompted speculation that the next move in rates will be up.
The Australian currency fell 0.7 percent against the dollar to $0.8212, after hitting a high of around $0.8340 on Tuesday.
Against the yen it lost 0.6 percent to 77.53 yen after touching a six-week high of 79.29 yen the previous day.
"Asset prices have climbed everywhere this month, giving investors a chance to book profits before their summer vacation," said a trader at a Japanese brokerage in Tokyo.
"There isn't any fresh factor that would prompt investors to trim risks now," he said.
Analysts also noted that thin summer trading may be prompting stronger-than-usual movements in major currency pairs.
Later Friday, investors will be looking ahead to the Federal Reserve's release of its Beige Book of Economic Conditions at 1800 GMT on Wednesday, while focus this week remains on U.S. second-quarter gross domestic product figures on Friday.
The market also awaits more U.S. Treasury auctions this week and the effect on yields. A record $42 billion two-year Treasury auction on Tuesday had little impact on the currency market.
Analysts noted some concern, however, after lacklustre results at Tuesday's auction raised questions about how easily it will be to find buyers for the large amount of bond supply due this week.
The Treasury will auction $39 billion of five-year notes on Wednesday and $28 billion of seven-year notes on Thursday.
