Possible indictments of White House officials over the leak of a CIA agent's name and the withdrawal of President George W. Bush's nominee Harriet Miers from consideration as a US Supreme Court Justice have weighed on a market that, for once, is not obsessed with higher US interest rates.
"We've got a few things hanging over this market," said John Beerling, chief dealer at Wells Fargo in Minneapolis.
"We're waiting for news of a possible indictment (in the CIA leak probe). The Harriet Miers withdrawal has cast a pall over the whole administration, and the economic numbers have been less than stellar," he noted.
In late trading, the euro rose to $1.2136, up 0.6 percent from late Wednesday, but off its earlier highs at $1.2174. Against the yen, the dollar retreated from a two-year peak of 116.22 yen hit in Asia, according to Reuters data, to trade at 115.48 yen, down 0.3 percent.
The dollar retraced some of its losses in the afternoon session as traders squared positions going into Friday's US economic numbers.
US gross domestic product for the third quarter, due Friday morning, is estimated to have grown 3.6 percent, speeding up from 3.3 percent in the previous quarter, according to a Reuters poll. On the other hand, markets expect a final University of Michigan consumer confidence index to drop to 76.4 this month.
"A lot of the bounce-back in the dollar is due to positioning. But so much of the dollar's fall is really unconvincing anyway," said Firas Askari, vice president and manager of foreign exchange trading at BMO Nesbitt Burns in Toronto.
"The euro above $1.22 to me is a sell. We've got a Fed under (Ben) Bernanke that seems committed to continue interest rate hikes, even though there has been more talk of ECB (European Central Bank) moves in that direction. But until that comes to fruition, people are going to be sceptical of the euro," he added.
General Motors Corp's earlier announcement it had been subpoenaed by the US Securities and Exchange Commission as part of a probe into its accounting practices had kicked off the dollar's initial sell-off overnight and this morning. Dollar selling, however, has abated since.
The dollar extended its fall after data on US September durable goods orders showed a drop of 2.1 percent, nearly double the 1.1 percent decline forecast by economists.
The currency also did not take much comfort from a US housing report which showed September new home sales at a 1.222 million annual rate, below market expectations for a 1.300 million rate.
The dollar fell 0.7 percent against the Swiss franc to 1.2737 francs. Sterling, meanwhile, gained 0.4 percent to $1.7825.
Ronald Simpson, managing director of global currency analysis with Action Economics LLC in New York, said among other things, GM's problems "bring to mind the telecom meltdown we saw a few years ago which weighed on the whole US outlook."
Three years earlier, the dollar was hit when telecommunications giant WorldCom filed for bankruptcy protection in one of the country's biggest accounting scandals.
Some analysts say worries about GM could hurt foreign investor appetite for US corporate bonds. The dollar, which is sensitive to global capital flows, tends to suffer when investors shy away from US assets.