LONDON - The dollar tumbled to a record low against the euro and a 12-year trough versus sterling on Wednesday as the greenback ran into a fresh wave of selling after consolidation earlier this week.
The dollar, which has lost almost a tenth of its value against a basket of currencies in the past four months, has been rattled by concerns about the U.S. current account gap and speculation Washington is happy to see a weaker dollar.
Remarks by European Central Bank President Jean-Claude Trichet on Tuesday suggesting the bank was unlikely to intervene in favor of the dollar also underpinned the single currency.
"Forces driving the dollar are still the same, concerns about the current account deficit. A rise in sterling, triggered by strong UK data, is also contributing to dollar weakness," said Niels Christensen, senior currency strategist at Societe Generale in Paris.
"Sentiment against the dollar is deep-rooted. Every time we have a pullback in euro/dollar new buyers emerge."
The dollar hit a record low of $1.3335 per euro in early European trade but later trimmed losses to $1.3294 by 5:40 a.m. EST -- virtually unchanged from late New York levels. It stood at 102.85 yen, more than half a yen away from last week's 4-1/2 year low of 102.15.
The pound rose to $1.9219, its highest since before Britain was ejected from Europe's Exchange Rate Mechanism in 1992.
US DATA AND JAPAN WARNINGS
Market players were turning their attention to a slew of U.S. economic indicators due this week, including manufacturing data at 10 a.m. EST and the monthly payrolls report on Friday.
Better than expected data could reinforce expectations the Federal Reserve will steadily raise U.S. interest rates, but analysts say sentiment about the dollar was so poor the positive effects are likely to be short-lived.
"U.S. economic data have been ignored when it's good, and added to negative dollar sentiment when it's bad," Christensen said.
Markets are also awaiting a speech by Federal Reserve Bank of San Francisco President Janet Yellen later on Wednesday to see whether she will echo the view of other Fed officials that the dollar needs to fall to correct the current account gap.
Cementing the view U.S. authorities were happy to see a weaker dollar was Fed chairman Alan Greenspan, who said last month investor appetite for U.S. assets will eventually dwindle given the size of the gap.
Investors remained wary about potential Japanese intervention to underpin the dollar against the yen, especially with the U.S. currency trading under 103 yen.
Japan's top financial diplomat Hiroshi Watanabe said Japan and Europe can take harmonised currency action and reiterated Japan would act firmly on rapid currency moves.
Japanese Finance Minister Sadakazu Tanigaki also said earlier that he was ready to take action as needed against unusual moves in the currency market.
In Europe, data showed growth in the euro zone's manufacturing sector almost came to a halt in November with the Eurozone Manufacturing Purchasing Managers' Index tumbling to 50.4 from 52.4 in October.
"The euro zone economy is taking a turn for the worse. If we were to get a confirmation of this next month -- if the survey goes below 50 -- the market could anticipate that policy rates will go down and that the euro is over appreciated and is hurting the economy," Peter Fontaine, FX strategist at KBC in Brussels.
The figure was in sharp contrast to Britain where manufacturing grew at its most fastest pace in four months.
Sterling has drawn support from strong data which raised expectations there might be some room left for British interest rates to rise.