The dollar backed off two-month highs against the euro but held firm against the yen on Wednesday after data showed the United States was attracting more than enough foreign capital to fund its huge trade deficit. The specter of further rises in U.S. interest rates fueled hopes that inflows of foreign capital would gain momentum as the dollar's yield advantage over the euro increases.
U.S. consumer price data, due at 8:30 a.m. EST, will be closely-watched for clues on how fast U.S. interest rates will rise in the coming months. The Federal Reserve raised rates five times last year, lifting U.S. rates above those in the euro zone in December.
"A lot of people are taking the view the strength of the U.S. economy and rising U.S. interest rates will support the dollar," said Jesper Dannesboe, foreign exchange strategist at Credit Suisse First Boston. "The dollar's downtrend has not reasserted itself since the start of the year."
At 3:45 a.m. EST, the U.S. currency was firm at 102.35 yen, having recovered from a five-year low of 101.67 yen hit on Monday. Against the euro, the dollar was down almost half a percent on the day at $1.3085, but still within a cent of Tuesday's two-month high of around $1.2995.

RISING U.S. RATES
The dollar had inched up in late U.S. trading after data showed that foreign investors pumped $81 billion into U.S. assets in November, far exceeding market forecasts for $55 billion.
This was more than enough foreign investment to cover the record $60.3 billion trade gap notched the same month, easing concerns about the U.S. trade imbalances -- the main culprit behind the dollar's weakness in recent years.
Purchases of U.S. bonds by foreign investors could increase as U.S. interest rises, currently at 2.25 percent, rise further above the euro zone's comparable rate of 2.0 percent.
The Fed is expected to continue its policy of measured monetary tightening, with markets pricing in quarter-point rate hikes at each of its next three meetings.
This could bring back global funds that fled a low-yielding dollar to seek higher returns from assets ranging from the euro and gold to equities and more obscure commodities.
"With the federal funds rate expected to rise to three percent, the euro and some commodities will have trouble maintaining the current levels," said Junichi Makino, senior economist at Daiwa Institute of Research in Tokyo.

YEN TIRES
The yen has outperformed this month on expectations that Asian currencies will rise if, as most expect, the Group of Seven industrial powers urges China to revalue its currency at the G7 meeting in early February.
But the Japanese currency has stalled this week as Japan has reiterated it is prepared to intervene on the foreign exchanges and skepticism has grown about the possibility of China taking such a step any time soon.
Indeed, the G7 has repeated called for China to modify the yuan's peg to the dollar in the past year, to no avail.
"We were talking about the same stuff ahead of the G7 last year," said a trader at a Japanese bank.
Bank of Japan Governor Toshihiko Fukui said on Wednesday that G7 nations would discuss long-term imbalances in the global economy at their meeting in London on Feb. 4-5.
"For the time being, it's necessary to secure a more sustainable recovery this year and next year," he said.
Japan's Finance Minister Sadakazu Tanigaki, meanwhile, said the country was watching currency rates closely and stood ready to act if abnormal moves are detected.
Earlier, Japan's central bank repeated it view that the country's recovery had lost some of its strength, with exports and output less robust than early last year.