The euro rose against the dollar on a technical rebound after hitting a 2.5 month low, but the upside was limited due to ongoing concerns about the banking system and the economy.
Traders were quick to cover their short positions after the euro failed to slide further, dealers said.
But underlying sentiment remained weak as banks continued to be crippled by soured assets and a global economic downturn showed no real sign of recovery.
In such circumstances, the dollar remained the currency of choice, dealers added.
"Recent moves have been quite sharp, so this is likely a temporary reprieve," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "The risks are still heavily to the downside for the euro."
By 8.18, the euro was up 0.3 per cent at $1.2626 after falling to $1.2558 on trading platform EBS, its lowest since December 4th. Sterling was trading at 88.8 pence.
The euro rose 0.4 per cent to 116.75 yen.
The euro tumbled after Moody's Investors Service threatened to downgrade euro zone banks with significant exposure to the weakening economies in Eastern and Central Europe, and Standard & Poor's said it may review emerging Europe bank ratings.
The dollar was up 0.1 per cent at 92.47 yen after rising to a more than one-month high of 92.75 yen yesterday.
"On balance, risk aversion will continue for now enabling further US dollar gains for now," said UBS in a research note.
Data yesterday showed foreigners bought a net $34.8 billion in long-term US securities in December, reversing outflows in the prior month. That was tied to so-called safe-haven flows, analysts said.
Reuters