The euro hit its highest level against the dollar in nearly a month early yesterday on the back of expectations of a quarter point increase in European interest rates tomorrow.
However, the currency subsequently gave up the gains as investors took profits.
The euro ended the session at $1.2792, down 0.27 per cent, having earlier hit $1.2835.
An European Central Bank rate rise to 3 per cent when its governing council holds a rare summer holiday meeting tomorrow is seen as a near-certainty, with analysts forecasting at least one and more likely two more quarter-point rises by year-end.
If the ECB moves as expected, it will add a further €34 to the average monthly repayments of homeowners, with the cost of a typical mortgage of €250,000 over 25 years set to rise to €1,333.
Borrowers on a typical tracker rate of 3.85 per cent have already seen €100 added to monthly mortgage costs as interest rates rose by three-quarters of a percentage point since December.
Investors were less certain about the outlook for US rates though there is growing expectation that the Fed will hold rates at 5.25 per cent when its open markets committee meets next Tuesday.
"Outside of the chance of a Fed hike next week, the dollar will probably continue to weaken over the short term, especially with the ECB likely to hike tomorrow," according to Geoff Kendrick, currency strategist at Westpac.
The dollar dipped initially following publication of a report on private sector employment that showed a slower pace of US job creation in July than forecast. However, it soon recovered its poise.
