LONDON—The euro drifted higher against the dollar in European hours Wednesday, retracing some of the week's sharp losses ahead of a keenly awaited U.S. Federal Reserve policy statement.
Unconfirmed talk that China would commit funds to the euro-zone rescue fund, the European Financial Stability Facility, briefly propelled the single currency above $1.38 against the dollar and lifted other currencies correlated to risk such as the Australian dollar.
That allowed traders to shrug off poor European economic data that showed that manufacturing activity in the euro zone contracted for a third consecutive month in October and German unemployment inched higher.
"The turmoil in the financial markets is having a real effect on the real economy," said Peter Kinsella, senior currency strategist at Commerzbank in London.
But hopes China would ride to the euro zone's rescue were quickly dashed after the EFSF said it planned to hold off from selling a new €3 billion ($4.11 bilion billion) bond due to volatile market conditions.
The single currency slipped back below $1.38 while sterling and the Australian dollar also gave back earlier gains.
Sterling jumped to the day's high of $1.6044 against the dollar after the October construction purchasing-managers index for the U.K. showed a healthy, above-consensus expansion in activity.
The Federal Open Market Committee announces its rate decision at 12:30 p.m. EDT and Chairman Ben Bernanke's press conference is scheduled for 2:15 p.m.
"We don't expect a lot from the FOMC. There is some chatter that it might do something with mortgage-backed securities, but we don't expect that until later in the year. If that happens, then that would be good for risk sentiment in the U.S. but that's not necessarily very good for the dollar," said Mr. Kinsella.
But RBC Capital Markets's chief currency strategist Adam Cole warned that the backdrop isn't as rosy as it was immediately following the European Union summit last week, narrowing the odds for a third round of U.S. quantitative easing.
ADP private payrolls for the U.S are also scheduled for release at 8:15 a.m. Expectations are for a small increase to 100,000 from 91,000 last month and any surprise will be closely watched ahead of November non-farm payrolls due Friday.
The euro was recently trading at $1.3773 against the dollar, compared with $1.3700 late Tuesday in New York. The dollar was at ¥78.06, compared with ¥78.38, while the euro was at ¥107.2, compared with ¥107.40. The pound was trading at $1.5977 against the dollar, compared with $1.5948 late Tuesday in New York.
The ICE Dollar Index, which tracks the greenback against a basket of currencies, was at 76.982, compared with 77.330 late Tuesday in New York.
—Dow Jones Technical Strategist Francis Bray contributed to this article.
