LONDON (AFP) - The euro remained stuck around the 1.29-dollar mark as the market mulled the prospect of possible European Central Bank intervention to halt the currency's export-sapping appreciation against the dollar.
The single European currency stood at 1.2907 dollars in late European trading compared with 1.2894 late on Wednesday in New York.
The dollar dropped to 106.72 yen against 107.08 on Wednesday.
The euro's rally, which saw it breach the 1.30-dollar mark Wednesday for the first time since its launch in 1999, ground to a halt as the market reacted to comments from eurozone officials as well as mounting expectations of another US rate hike by year-end.
However, because of a public holiday in the US Thursday, market activity has been subdued.
In recent days, ECB officials have ratcheted up their language on the euro's rise, which could potentially grind anaemic eurozone growth to a halt.
Most importantly, the ECB's president Jean-Claude Trichet backed up his description of recent exchange rate movements as "brutal" and "not welcome".
Trichet told a conference in Palermo Thursday that it was "necessary" to say what he did on Monday, when he stated that the euro's appreciation was not welcome from the ECB's standpoint.
In addition, his deputy Lucas Papademos told an audience in Tokyo that excess volatility in foreign exchange markets was undesirable.
In light of the objections, the markets were on the lookout for possible euro selling and dollar buying from the European Central Bank.
"It's clearly on the agenda and we are now entering the zone of actual market intervention," said Neil Mackinnon, chief economist at ECU Group.
"By pushing the euro through 1.30 dollars, investors should be on alert, for we are close to the (ECB's) pain threshold," he added.
The ECB's last foray onto foreign exchange markets was in late 2000. At the time it acted in coordination with other Group of Seven countries to buy euros and sell dollars after the eurozone unit plunged to a record low of 0.8230 dollars.
The US monetary authorities were unlikely to get involved and were widely believed to be in favour of a managed depreciation in the dollar.
"The perception that the US favours a weaker dollar to help rectify the huge current account imbalance contrasts sharply with the European policy stance and is likely to become an increasing source of friction over coming weeks," said Mitul Kotecha, senior currency strategist at CALYON.
Though US officials have been notably silent about the dollar developments, alarm bells appeared to have been rung at the Bank of Japan, which has a reputation for intervening in the market to stem the yen's appreciation.
"We can't rule out joint intervention between the ECB and the BoJ," said ECU Group's Mackinnon.
The dollar was also benefiting from the US Federal Reserve's move to raise US interest rates overnight and suggestion that more rate hikes may follow.
After peaking at 1.3005 dollars Wednesday, the single European currency slipped back under 1.29 dollars as investors digested the slightly more upbeat stance from the rate-setting Federal Open Market Committee (FOMC).
Though the Fed's decision to raise its key federal funds rate by a quarter point to 2.0 percent was widely expected, dollar bulls were encouraged by the accompanying statement, which suggested that another interest rate hike in December remains on the cards.
The FOMC said it could continue to raise rates at "a measured pace" and that policy, even after Wednesday's hike, remained accommodative. The path of US rates now depended on the flow of upcoming economic data.
Separately, data showing that the German economy grew just 0.1 percent in the third quarter from the second quarter, also weighed on the euro. Economists polled by AFX News had forecast quarter-on-quarter growth of 0.3 percent in the eurozone's biggest economy.
Against the pound, the euro held its own, buoyed by the relatively dovish economic projections from the Bank of England Wednesday, which suggested that British interest rates may have already peaked.
The euro found a footing above the psychologically important 0.70-pound level.
The euro was changing hands at 1.2907 dollars from 1.2894 late on Wednesday in New York, 137.74 yen (138.08), 0.7006 pounds (0.6978) and 1.5189 Swiss francs (1.5229).
The dollar stood at 106.72 yen (107.08) and 1.1765 Swiss francs (1.1808).
The pound was at 1.8427 dollars (1.8570), 196.60 yen (197.79) and 2.1679 Swiss francs (2.1812).
On the London Bullion Market, the price of an ounce of gold stood at 433.80 dollars against 433.40 late on Wednesday.

11/11/2004 - 19:36 GMT - AFP