Dollar Draws in Buyers

The euro and the pound retreat slightly.
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The dollar was edging higher against the major currencies Thursday on thoughts that the greenback's softness earlier in the week had been overdone.

Euros were trading for $1.388, down from $1.3906 late Wednesday, having reached another record high of $1.3927 in overnight action before retreating. The British pound was selling for $2.0249, down from $2.0307 a day earlier.

One dollar would buy 114.99 yen vs. 114.18 yen previously.

"We've had this sort of mentality of record lows for the dollar," says Bob Sinche, head of currency strategy at Bank of America in New York. "But now expectations about

Federal Reserve

interest rate policy have changed."

The weakness in the dollar since mid-August has been driven in large part by data showing an increasingly soft U.S. economy. That in turn raised expectations that the Fed would make a larger cut in rates when it convenes next week -- half a percentage point rather than a quarter.

But it seems that forecasts about exactly how bad the economy is may have been somewhat overdone, with the latest government data showing a lower-than-expected increase in new claims for unemployment insurance. That in turn points to increased likelihood of the Fed making a smaller cut in rates and so makes the dollar more attractive relative to other currencies than it was previously.

The exchange-traded funds that track the values of various currencies against the dollar were falling.

The

CurrencyShares British Pound Sterling Trust

(FXB) - Get Report

and the

CurrencyShares Euro Trust

(FXE) - Get Report

were both off about 0.2%. The

CurrencyShares Japanese Yen Trust

(FXY) - Get Report

was down about 1% in recent activity.