The dollar hovered near a 15-month low against a basket of currencies and was in sight of a 29-year trough against the Australian dollar as a bounce in equities suggested that risk appetites were on the mend.
The euro dipped to a session low $1.4150 after Standard and Poor's downgraded Portugal's credit ratings and warned it could cut it again, but it quickly recovered as further losses were clipped by bids seen around $1.4140.
Analysts said the broader picture was one of dollar weakness on the back of a recovery in global equities and improving risk sentiment, while the euro had become somewhat resilient to ratings downgrades given that much of the euro zone's fiscal woes has been priced into its value.
"The market is treating many of these downgrades as rear-guard action which is already well discounted and the dollar is under pressure broadly," said Todd Elmer, currency strategist at Citi in Singapore. "This will continue to support the euro even if we do see some marginal negative news on the sovereign debt crisis."
In late Asian trade, the euro traded around $1.4180, up slightly from late US trade.
The single currency has rebounded after sliding to around $1.4050 yesterday. Traders suspected Asian sovereign names had been buying the euro around that level.
The buying put back into view a 4.5-month high of $1.4249 hit earlier in the week, and analysts including Elmer at Citi expected the euro to soon retest that level, and subsequently $1.4283, a peak in early November.
European leaders agreed yesterday to increase their financial rescue fund to the full €440 billion by June, but avoided discussing Portugal which is under pressure to seek a bailout after its prime minister resigned. [ID:nLDE72O02D]
The euro has largely brushed off worries over the fiscal woes of highly-indebted euro zone countries such as Portugal, supported in part by market expectations that the European Central Bank would raise interest rates as early as April, boosting its yield advantage over the dollar.
In another sign of the dollar's broad weakness, the Australian dollar hovered near its December 31 peak around $1.0257 - a level not seen since 1982. The Aussie dollar last stood at $1.0220, up a touch from yesterday.
"With US equities rising on solid earnings, it looks as if risk appetite is improving," said a trader for a major Japanese bank in Tokyo.
The dollar index, which measures the dollar's value against a currency basket, was flat at 75.656, but hovered near 75.340 hit earlier this week, its lowest since December 2009. Traders said a breach of 75 could open way for a further fall.
Markets have settled after Japanese equities plunged last week on worries over the economic toll from Japan's earthquake and tsunami, while fears over a quake-crippled nuclear power plant had spurred a bout of risk aversion.
Joint intervention by the Group of Seven industrialised nations to sell the yen to contain its surge versus the dollar and other currencies has stabilised the FX market.
The dollar held steady against the yen at 80.99 yen, staying some ways above a record low of 76.25 yen hit last week.
Investors are bracing for the possibility of more yen-selling intervention by Japan, while dollar selling interest by Japanese exporters ahead of the financial year-end is likely to temper gains in the US currency.
Traders in Hong Kong cited slight dollar demand at 80.90 and 81.00 yen, while adding that selling demand was limited in Asian trade. A trader for a major Japanese bank in Tokyo said there were dollar offers at levels above 81.50 yen.
Market participants see Japan defending the dollar around 80 yen through the fiscal year-end, while analysts say Tokyo will step in to curb yen strength around that level beyond March if any yen appreciation is accompanied by erratic market movements.
Japan has said the aim of any intervention is to quell market volatility. Last week's action achieved this, as the dollar has been glued to the 81 yen region throughout this week while implied volatility has dropped sharply.
Reuters