In early European deals on Wednesday, the U.S. dollar plummeted against its major counterparts on the back of higher oil prices.
The dollar fell to a 1-week low against the yen, while it eased from a multi-month high against the pound and new multi-week highs against the franc and the euro.
Oil rose above $73 per barrel today after several days of falls, supported by industry data showing a big drop in U.S. crude stocks.
The American Petroleum Institute (API) said in a report late on Tuesday that crude inventories in the world's top oil consumer fell 5.8 million barrels last week, bucking expectations for a rise, as refiners boosted fuel production.
U.S. crude for January delivery rose 88 cents to $73.50 per barrel at 3:56 am ET, after falling $1.31 on Tuesday. NYMEX crude, which hit its lowest level since late November at $72.43 on Monday, has lost more than 7 percent this month.
London Brent crude gained 78 cents to $75.97.
Losses over the last five days have been partly driven by a recovery in the dollar. Oil is priced in dollars so a rise in the currency makes fuel more expensive to most consumers.
U.S. crude oil futures surged to a year high of $82 per barrel in October, from below $33 last December.
The dollar plunged to a 1-week low of 87.38 against the yen at 3:50 am ET Wednesday. The next downside target level for the dollar is seen at 84.4. At yesterday's North American session, the dollar-yen pair was quoted at 88.41.
Japan's gross domestic product expanded by just 0.3% in the third quarter of 2009 compared to the previous three months, the Cabinet Office said today in its final report. That was well below analyst expectations for a 0.7 percent quarterly increase following the 1.2 percent expansion in last month's preliminary report.
On an annual basis, GDP was up 1.3 percent - again missing expectations for a 2.8 percent increase after the preliminary report showed a 4.8 percent jump.
At 4:35 am ET Wednesday, the dollar touched 1.4768 against the euro and 1.0232 against the Swiss franc, falling from early Asian session's new multi-week highs of 1.4670 and 1.0294, respectively. If the dollar weakens further, it may target 1.490 against the euro and 0.997 against the franc. The euro-dollar pair closed trading at 1.4702 and the dollar-franc pair at 1.0273 on Tuesday.
The euro remained higher against the dollar today as the German trade surplus increased more than expected in October. The German trade surplus increased to EUR 13.6 billion in October, the Federal Statistical Office reported. The surplus stood above the expected EUR 10.7 billion and September's revised surplus of EUR 10.4 billion.
In addition, Germany's Federal Statistical Office said in a final report that the consumer price index or CPI increased 0.4% year-on-year in November, faster than the flat reading in the previous month. The consumer price inflation in November was revised from 0.3% estimated initially. The consumer prices increased for the first time since June 2009.
On a monthly basis, the CPI dropped 0.1% in November, revised from 0.2% decline reported initially. In October, the CPI was up 0.1%.
The Singapore based DBS bank said in a note today that the EUR/USD pair is almost back down to the level, where it started the fourth quarter of this year.
DBS noted that the currency pair closed at 1.4698 yesterday, drawing it closer to third quarter's closing of 1.4635.
The research group also said that the sell-off in the EUR since last Friday, triggered by an upbeat US jobs report, is also approaching some technical support levels. "Having broken below the 50-day moving average last Friday, the 100-day moving average at 1.4627 could emerge as a support, which is also where the lower limit of the ascending price channel (based on daily close data) seems to be located"
Meanwhile, UniCredit analysts said today that Idiosyncratic risks have abruptly resurfaced across Europe and this may still favor a stronger USD and a firmer JPY.
At this stage, UniCredit said they will not open fresh positions on FX majors, but rather look to conservative trades like going long NOK-SEK.
"As long as fears about Greece loom, the euro may suffer further both versus USD and JPY", UniCredit noted. However, they expect the EUR-USD pair to lose its upside potential only in case of a drop below the 1.45 support level, while a full break of 128.95 would send the EUR-JPY towards 125.
After having been put on negative outlook by S&P, yesterday Greece was downgraded by Fitch from A- to BBB+, with negative outlook on concerns over the medium-term health of public finances.
After hitting a multi-month high of 1.6170 against the pound at 2:10 am ET Wednesday, the dollar slipped. As of now, the dollar is worth 1.6316 per pound, compared to 1.6287 hit late New York Tuesday. On the downside, 1.648 is seen as the next target level for the US currency.
UK's visible trade deficit stood at a seasonally adjusted GBP 7.1 billion in October, larger than the revised shortfall of GBP 6.9 billion in September, the Office for National Statistics reported. The expected deficit was GBP 6.85 billion.
Looking ahead, U.K.'s Chancellor Alistair Darling is expected to present his pre-budget statement at 4:30 am ET. Darling is expected to announce a tax on the bonuses paid by banks.
Analysts at UniCredit said today that the Sterling may suffer again if UK's Darling confirms a bleak picture for the UK economy and a sharp worsening of the UK budget deficit.
Indeed, UniCredit added that a steady BoE outcome tomorrow may still limit cable downside. Yet, the firm said they would buy cable on dips if key support at around 1.60 holds.
The U.S. wholesale inventories report for October has been slated for release in today's North American session.
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