The dollar edged down against the euro on Tuesday and market players pondered whether the U.S. currency could sustain its gains from its recent rally on the back of smaller U.S. job losses last month.
The jobs data boosted expectations for higher U.S. interest rates by early next year, so investors will likely take their cue on the dollar from the U.S. Federal Reserve's policy meeting which concludes on Wednesday.
But many remain cautious as the dollar had a similar short-lived climb in early June, as markets speculated U.S. interest rates would start to rise sooner than expected.
"The dollar is holding onto Friday's payroll-inspired gains, but it needs some fresh support to avoid sinking back as it did in June," said Chris Turner, head of FX strategy at ING.
By 0929 GMT, the euro was little changed at $1.4161, having fallen to a near one-week low of around $1.41 on Monday. Traders saw support at the 40-day moving average around $1.4095.
The market showed little reaction to German consumer price inflation which was revised up to show a fall of 0.5 percent in July year-on-year, while the harmonised consumer price index posted its first annual drop since the index was introduced in 1995.
The dollar was largely flat against higher-yielders such as the Australian and New Zealand dollars, but the yen gained as investors trimmed long positions in those currencies after Chinese data showed below-forecast factory expansion.
The Aussie was down 0.4 percent against the yen at 80.96 yen , off a 10-month high of 82.00 yen on Monday, while the New Zealand dollar was down 0.7 percent at 65.23 yen, also retreating from a 10-month peak at 65.90.
Markets showed little reaction after the Bank of Japan left interest rates unchanged at 0.1 percent. BOJ Governor Masaaki Shirakawa said he saw no risk of a deflationary spiral in Japan.
The dollar was down 0.3 percent at 96.77 yen, off an eight-week high of 97.79 yen set last week.
The Fed is expected to keep rates steady, but give a slightly brighter picture of the economy while dampening rate hike speculation. It is also likely to end its $300 billion Treasury purchases programme, as scheduled.
"We believe it is too early for a cyclical dollar rally," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, but added a risk of the dollar rallying in the short-term.
Traders will keep an eye on the U.S. Treasury's quarterly refunding, where it will auction $37 billion dollars of 3-year notes on Tuesday of a total $75 billion on offer this week.
Meanwhile, the euro hit a session high against the Swedish crown of 10.2700 crowns after ratings firm Standard & Poor's cut sovereign credit ratings for Estonia and Latvia on Monday. It said it may do the same for Lithuania. Swedish banks are heavily exposed to the Baltic region, which is gripped by deep recession.
S&P cut Estonia's investment grade rating to A-minus from A, and trimmed Latvia's speculative grade rating to BB from BB-plus.
