The dollar fell to a record low against the euro on Wednesday after traders initially bought the US currency on a favorable US trade gap report, prompting others to take profits and bring the dollar lower.
The US government said that its trade deficit narrowed to $51.56 billion in September, compared with a revised $53.55 billion shortfall in August. The market had expected a September trade gap of $53.5 billion.
"The market is fairly convinced that this policy of likely benign neglect on the part of the (Bush) Administration to a weaker currency is suggesting much lower levels for the dollar going forward," said Mr Robert Sinche, head of global currency strategy with Bank of America in New York.
"What you're seeing is that any bounce in the dollar is being seen as a chance to sell dollars," he added.
"Even though the data was better than expected, the idea of a $50 billion monthly trade deficit still is something that is very recent and remains worrying," said Mr Bob Lynch, currency strategist at BNP Paribas in New York.
If Americans continue to buy foreign goods faster than US businesses can sell their goods and services overseas, the outflow of dollars will remain heavy.
By early morning in New York, the euro jumped to a record high of $1.3005 according to Reuters data before coming back down to around $1.2955.
Against the Swiss franc, the dollar fell to a near nine-year low of 1.1697 francs before bobbing back up to 1.1755 francs. However against the yen, the dollar was up 0.6 per cent on the day at 106.32 yen after hitting a seven-month low on Monday.
The dollar's slide has been slowed by a series of comments from European policymakers, who issued warnings about the detrimental effects of a strong euro.
European Central Bank Governing Council member Mr Nout Wellink was quoted as saying the euro's recent rise has been "worrying" and "shouldn't go on."
European Central Bank Governing Council member Mr Klaus Liebscher also said that it was "quite a problem" for the euro zone to bear the brunt of international exchange rate movements.
Markets were also cautious ahead of the Federal Reserve's interest rate meeting later in the day, which is expected to deliver a quarter-point hike and comments that could shed light on future policy moves. The Fed is expected to raise the key US federal funds rate by a quarter point to 2.0 per cent , equal to the benchmark official rate in the euro zone.