By Joice Alves and Kevin Buckland
LONDON/TOKYO (Reuters) -The dollar fell on Wednesday, further retreating from a nearly three-month high against the euro hit a day earlier, with a decline in U.S. bond yields adding to the pressure.
Analysts pointed to technical factors for the dollar's pullback, following a two-day rally of as much as 1.4% against the euro after unexpectedly strong U.S. jobs data, as well as more hawkish rhetoric from Federal Reserve Chair Jerome Powell, scuppered bets for an early interest rate cut.
U.S. Treasury yields gained some respite on Wednesday after falling from this week's highs on solid demand at a sale of new three-year notes, removing some support for the dollar.
The dollar was down 0.16% to $1.0772 per euro, after retreating 0.1% on Tuesday, when it had earlier touched its strongest level since Nov. 14 at $1.0722.
The U.S. dollar index - which measures the currency against six major peers, including the euro - slipped 0.1% to 104.04, following Tuesday's 0.29% slide. It had reached the highest since Nov. 14 at 104.60 on Monday.
"The bounce back in Treasuries yesterday allowed some profit-taking in long U.S. dollar positions," said Jane Foley, head of FX strategy at Rabobank.
"Despite the ruling out of March rate cut hopes, the market is still showing some reluctance to go all in on the long U.S. dollar trade given the high conviction around rate cuts later in the year".
Analysts and traders highlighted next Tuesday's U.S. inflation data as a key test for Fed rate bets.
Traders are currently pricing in a 21.5% chance of a rate cut in March, the CME Group's (NASDAQ:CME) FedWatch Tool shows, compared with a 68.1% chance at the start of the year.
A sharper than expected fall in industrial production in the euro zone's largest economy had no impact on the euro as "Germany's industrial malaise is now a well-known story", said Chris Turner, Global Head of Markets at ING.
The dollar edged 0.08% higher against the yen to 148.07, after sliding 0.49% on Tuesday. The currency pair tends to be extremely sensitive to moves in Treasury yields.
"Financial markets are in the process of recalibrating their expectations for Federal Reserve policy," said James Kniveton, senior corporate forex dealer at Convera.
"If positive economic data, particularly on inflation, persists in the U.S., the tide could turn towards earlier rate cuts, potentially weakening the greenback further."
Sterling rose 0.27% against the dollar to $1.2633 after higher house prices in Britain supported bets that the Bank of England (BoE) was not likely to cut interest rates any time soon.