Market players were becoming wary after the euro's sharp gains at the end of last year, as they began to focus on whether the European Central Bank's gradualist approach to cutting interest rates will hurt the eurozone's economy further.
"Currency markets will struggle to balance the euro's upside from interest rates not being cut aggressively with the concern that the economy is destined for a sharp deterioration on the back of this measured policy reaction," said Daragh Maher, currency strategist at Calyon in London.
By 1130 GMT, the euro was down 0.3 percent against the dollar at $1.3949, having earlier hit a session low of $1.3841. The final reading of the Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector fell to 33.9 in December, below the 34.5 flash estimate and market forecasts. Meanwhile, sterling resumed its downtrend in choppy trade, after a slew of data painted a gloomy picture of the UK economy.
The euro was up 0.8 percent against sterling at 96.54 pence , after dropping more than one percent in Asian trade. It had hit a record 98.05 pence earlier this week.
The pound was also down 0.9 percent against the dollar at $1.4477. British mortgage approvals for house purchases fell to a record low in November, while a separate Bank of England survey showed credit conditions looked set to tighten further in the next three months.
House prices also fell by a bigger-than-expected 2.2 percent in December, the country's biggest mortgage lender Halifax said "There just doesn't seem to be any floor at the moment to any of the housing market data," said Matthew Sharratt, UK economist at Bank of America. The figures reinforced expectations the BoE will cut key interest rates by at least 50 basis points next week from the current 2 percent.
On the US data front, traders will keep a close eye on the Institute for Supply Management's December manufacturing index due out at 1500 GMT. Markets expect a reading of 35.5 versus 36.2 in November. The dollar index, a gauge of its performance against six major currencies, rose 0.4 percent to 81.46.
Against the yen, the dollar was up 0.4 percent to 91.14. Although extremely volatile moves seem to have subsided recently, risk aversion is expected to remain a factor in 2009, especially as major economies are headed for a steep downturn before recovery. "Financial conditions may continue to improve gradually, but economic distress will likely keep risk aversion high," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.