The dollar pared losses against the euro and other currencies on Wednesday after the Federal Reserve's Beige Book report said consumer spending has risen, though concerns about Europe and the oil spill have grown.
Traders also watched equity markets, which pared big gains while indicating more optimism and less need for the relative safe-haven status of the U.S. currency.
The dollar reached the lows of the session after Fed Chairman Ben Bernanke said the U.S. economy is strong enough to withstand the fiscal tightening coming ahead.
The dollar index (DXY), which tracks the U.S. unit against a basket of six major currencies, fell to 87.911, down from 88.307 in late North American trading on Tuesday.
The euro (CUR_EURUSD) rose to $1.1982, after spending much of the session above $1.20 and compared to $1.1942 on Tuesday.
The single currency's gains have mostly been a relief rally, after touching 4-year lows recently, said Dan Cook, senior market analyst at IG Markets.
Besides no fundamental change, like weak economic data, "there have been no headlines of note screaming about some unforeseen aspect of the sovereign debt crisis," he wrote in a note. "Unfortunately for the continental currency, this recent rally hasn't been driven by good news either and therefore it looks to be somewhat short lived."
On Wednesday, the Dow (DJI) declined 0.3%, after being up more than 1% after Bernanke's testimony was released.
The euro, the Dow Jones Industrial Average and 10-year Treasury note yields (UST10Y) have yet to recover from last Friday's rout, when worries about Hungary's financial health and a weak U.S. jobs report sent all three sharply lower.
In remarks prepared for the House Budget Committee, Bernanke said there are still "significant restraints" on the economy. He also said the sovereign debt crisis in Europe may have only a modest impact on the U.S. recovery if markets continue to stabilize.
Bernanke earlier this week sounded a modestly optimistic note on the outlook for the U.S. economy, saying that he didn't expect to see a double-dip recession.
Analysts will continue tuning into Bernanke's testimony for any indication that the policy-setting Federal Open Market Committee is preparing to alter its oft-stated pledge to hold interest rates at low levels for an "extended period."
He may be unlikely to give such a signal amid ongoing turmoil in the euro zone and in the aftermath of last week's disappointing U.S. jobs data for May, said Marco Valli, economist at UniCredit Bank.
China, Europe
The euro remains in a fragile state amid ongoing worries about sovereign debt and any spillover effect on euro-zone growth.
Currency analysts also noted pressure on the greenback earlier after a purported leak by Chinese government officials indicated China's May exports surged 50% from a year ago, far outstripping forecasts of a 30% rise.
The report spurred a rise in risk appetite, boosting equities and undercutting the dollar.
The leak helped ease fears of a global double-dip recession and suggested European demand may remain more robust than previously thought, said Boris Schlossberg, director of currency research at GFT.
"We are highly skeptical of this thesis given the fact that serious austerity measures in the euro zone have yet to kick in," he said. Such belt-tightening measures could cause demand to drop sharply in the second half of this year.
Both the euro and dollar turned higher against the Japanese yen, which often comes under pressure when investors exhibit greater comfort holding riskier assets, including stocks and emerging markets.
The euro (CUR_EURYEN) traded at ��109.24, up from ��109.01 on Tuesday. One U.S. dollar (CUR_USDYEN) bought ��91.17, versus ��91.32.
Against the Swiss franc, the euro (CUR_EURCHF) traded at 1.3765 francs, compared to 1.3784 francs late Tuesday, in volatile action after hitting an all-time low earlier at 1.3732 francs. Spikes in the exchange rate Tuesday prompted speculation that Switzerland's central bank had intervened to weaken its currency.
The British pound (CUR_GBPUSD) changed hands at $1.4526, up from $1.4404.
Copyright 2009 Dow Jones Newswires
CURRENCIES: Dollar Jumps To Fresh 4-year High Versus EuroEuropean debt worries world
