The greenback plunged Tuesday following comments from the US president-elect in an interview that it was too strong.
The greenback plunged Tuesday following comments from the US president-elect in an interview that it was too strong and that a weak Chinese yuan was "killing us", fuelling concerns of a possible currency war.
The sell-off marked a sharp turnaround for the US unit, which has been surging since Trump's November election on expectations his big-spending, tax-cutting plans will fan inflation and force a Federal Reserve rate hike.
“Traders recognise that and when you throw in levels that were overbought -- in a US dollar sense -- some sort of retracement was on the cards," Greg McKenna, chief market strategist at FX and CFD provider AxiTrader, said in a note.
"Add in Trump's recent rhetoric about the US dollar being too strong -- he was talking in context of China in this sense but the message is a broad one -- and you get a chance for further US dollar weakness."
Trump's comments came days before he takes the oath of office on Friday, with market-watchers hoping his speech will provide some detail on his plans for the US economy as well as his intentions on the global trade front.
On Tuesday Chinese President Xi Jinping warned at the World Economic Forum in Davos against protectionism, alluding to Trump's plans to tear up global trade deals, saying it was like "locking oneself in a dark room. Wind and rain may be kept outside, but so is light and air".
In afternoon trade Wednesday the dollar was up on the yen, euro and pound but was struggling against higher-yielding units including South Korea's won, the Australian dollar and Malaysian ringgit.
The pound held up as it witnesses a volatile week that saw it plunge to three-decade lows against the greenback on worries about Britain's plans for a clean break from the European Union.
However, it bounced sharply Tuesday after British Prime Minister Theresa May set out her plan to leave the customs union and single market in a so-called "hard Brexit", and promised to let Parliament vote on the deal.
"May’s announcement that both houses of Parliament will vote on the final Brexit deal is positive for the pound, as the process, at a minimum, should ensure that the most severe outcomes are avoided," said Stephen Innes, senior trader at OANDA.
Sterling shot up three percent -- its biggest gain since 2008 -- to more than $1.24 following her remarks, having plunged below $1.20 Monday as news emerged of her plans.
“There is nothing like clarity to turn around a market,” said McKenna.
On equity markets Sydney closed 0.4 percent down and Seoul finished 0.1 lower.
Singapore, Wellington, Mumbai, Taipei and Kuala Lumpur were also in negative territory.
However, Hong Kong rallied 1.1 percent, boosted by a flood of mainland Chinese investors picking up stocks considered cheap compared with those north of the border, while a pick-up in the yuan eased fears about the mainland economy.
Tokyo ended 0.4 percent higher as the dollar's advance against the yen helped Japan's exporters.
Shanghai finished up 0.1 percent. Late Tuesday China's Cabinet issued a notice saying it had granted approval in principle for foreign companies to list shares and issue corporate debt and other financing instruments as part of a drive to open up the country's markets.
In early European trade London and Frankfurt each rose 0.5 percent and Paris gained 0.3 percent.
- Key figures around 0800 GMT -
Tokyo - Nikkei 225: UP 0.4 percent at 18,894.37 (close)
Shanghai - Composite: 0.1 percent at 3,113.01 (close)
Hong Kong - Hang Seng: UP 1.1 percent at 23,098.26 (close)
London - FTSE 100: UP 0.5 percent at 7,256.31
Pound/dollar: DOWN at $1.2330 from $1.2409
Euro/dollar: DOWN at $1.0685 from $1.0712
Dollar/yen: UP at 113.40 yen from 112.65 yen
Oil - West Texas Intermediate: UP 21 cents at $52.69 per barrel
Oil - Brent North Sea: UP 23 cents at $55.70 per barrel
New York - Dow: DOWN 0.3 percent at 19,826.77 (close)