The dollar shuttled in a narrow range against most major currencies in light trade ahead of Christmas, but sterling tumbled on fears that UK interest rates could move lower.
The pound extended Tuesday's steep losses after minutes of the Bank of England's latest Monetary Policy Committee meeting showed that some members felt that the next move in borrowing costs should be down although all nine members voted to keep rates steady.
"The minutes were surprisingly dovish," said Daragh Maher, foreign exchange strategist at Calyon. "It does seem to justify the view that rates will move down," he added.
The dollar was wedged in a tight range against other major currencies.
The greenback fetched $1.3380 per euro by 1300 GMT, little changed from New York levels but within sight of its record low of $1.3470 hit earlier this month. It stood at 104.03 yen, down a third of a percent on the day.
Sterling fell as low as $1.9101, down almost one percent on the day. It fell around 0.75 percent against the euro to around 69.85 pence, a three-week low.
The euro showed little reaction to industrial orders and data that showed a sharp drop in foreign funds flowing into the euro zone.
Data showed a net outflow in October of combined direct and portfolio investment flows of 3.7 billion euros in October from 46.5 billion euros in September, while the current account surplus widened to 1.1 billion euros.
Euro zone industry orders were up 0.2 percent on the month in October and up 0.6 percent on the year.
POUND PUMMELLED
Britain's central bank has raised rates five times since November last year, bringing borrowing costs to 4.75 percent. Analysts have been divided over whether UK interest rates have peaked, with recent economic data painting a mixed outlook.
Two surveys released this week pointed to falling property prices but last week sterling hit a 12-year high against the dollar after upbeat retail sales data.
"The market was quite short euro/sterling and long cable going into the week and the squeeze is on," said Paul Mackel, foreign exchange strategist at ABN AMRO. "The minutes added fuel to the fire."
A rise in Tokyo's stock market helped the yen shrug off news of a sharp decline in Japan's trade surplus and a fall in the service sector activity.
Exports have been the main engine of Japan's two-year-old economic recovery but external demand became a negative contributor to gross domestic product for the first time in eight quarters in the three months to September.
Japan's trade surplus fell to 602 billion yen in November, down nearly 40 percent from the same month a year ago and lower than forecast.
Minutes of the Bank of Japan's November board meeting showed members reckoned exports would resume their recovery and that overseas economies would keep growing.
Dealers said currencies were likely to remain in tight ranges until the end of the year, but many predicted further dollar weakness going into 2005 as fears about the size of the U.S. current account deficit persisted.
The dollar has lost around three percent against the yen and six percent against the euro so far in 2004, putting it on track for its third consecutive calendar year of losses.