The dollar held near overnight levels against the euro and the yen on Thursday as traders hesitated to make big bets ahead of U.S. jobs data that is expected to provide near-term direction for the currency.
The non-farm payroll figures, due on Friday, will give investors a clue as to whether the dollar is likely to revert to the weakening trend that characterized its movements at the end of 2004.
"People are waiting for the jobs data. If it is strong the dollar might go up," said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank.
However, any rise will probably be capped due to persistent concerns about the ballooning U.S. current account and trade deficits, he added.
At 7:55 p.m. EST, the euro fetched around $1.3260 little changed from late New York levels but still down nearly 2 percent since the first day of trade this year.
The dollar was flat at 104.15 yen but up nearly two yen since the start of the year.
The dollar marked its biggest one-day rise against the euro and yen since mid-2004 on Tuesday on the prospect of higher U.S. rates and upbeat U.S. data, though the unwinding of dollar short positions was also seen as a key market driver.
Taking a cue from the U.S. dollar's comeback in recent days, the New Zealand dollar hit its lowest level in two months in offshore trade while the Australian dollar marked a three-week low.
A strong number in Friday's U.S. non-farm payroll data would likely reinforce expectations for further rises in U.S. interest rates.
Economists polled by said that 175,000 jobs were likely created in December, while the jobless rate was seen staying at 5.4 percent.
The dollar got a lift on Tuesday after minutes of the Federal Reserve's December meeting showed that the central bank was worried about inflation and suggested it would keep lifting rates.
Traders expect the U.S. currency to receive support from rising rates as more international investors are lured by relatively better returns on dollar-denominated deposits.
But some say that the market may have overestimated the attraction of the narrowing of the U.S. rate differential with other nations, especially given overriding concerns about the huge U.S. deficits.
"Probably during the course of this year we will see some point when U.S. interest rates become high enough to attract investment flows, but in the short term we probably can't expect that," said Sasaki at JPMorgan Chase.