It slipped from its earlier peak of $1.3127, the highest level since October 18, with technical strategists citing near-term resistance around the October high of $1.3140. Market sentiment soured after Spain's 4.25 billion euro ($5.56 billion) debt sale fell short of expectations and revived talk of an official bailout request from Europe's fourth-largest economy. Euro zone retail sales data for October also weighed on the euro after a sharper-than-expected fall thwarted prospects of a consumer-led recovery from recession.
"There was a little bit of a consolidation after the euro's strong run up, so we are seeing a little bit of retracement after the Spanish bond auction," said Marcus Hettinger, global FX strategist at Credit Suisse. The euro had strengthened broadly in recent days after Greece announced better-than-expected terms for a debt buyback, fuelling optimism the country will continue to receive international aid and avoid default. Market players who had previously bet against the single currency cut those positions as investor appetite for euro zone assets improved, although strategists warned the euro remained vulnerable to underlying worries about weak euro zone growth.
The fiscal cliff is a combination of tax hikes and spending cuts due to kick in early next year that could tips the world's biggest economy into recession. "At the moment, in our view the market is positioned for the fiscal cliff to be resolved before year end," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi. The ECB is expected to keep rates on hold at its policy meeting on Thursday but the bleak outlook for the euro zone has kept expectations of further easing alive.
Meanwhile, bets that the US Federal Reserve will unveil a fresh bond purchase scheme to replace Operation Twist, a programme that will expire this month, at its policy meeting on December 11-12 could weigh on the dollar. The euro pulled back from a 7-1/2 month high of 107.96 yen hit earlier on Wednesday to last trade up 0.1 percent at 107.33 yen, while the dollar rose 0.3 percent to 82.17 yen. The single currency also hit a 2-1/2 month high against the Swiss franc, extending recent gains after Switzerland's largest banks said they would charge for some franc deposits.