The U.S. currency gained some ground against the EUR Tuesday as a trickle of dollar short covering continued in the wake of better-than-expected U.S. jobs data last week, but the Dollar stayed on the back foot as Fed officials said the U.S. economy remained weak. The greenback fell against the Yen and struggled against the EUR after Federal Reserve Chairman Ben Bernanke cooled speculation of an early rise in U.S. interest rates. Bernanke said the U.S. economy still faced headwinds and unemployment could stay high for some time, playing down the impact of Friday's stronger-than-expected jobs report and helping send yields on shorter-dated Treasuries lower.

Against the Yen, the U.S dollar fell half a percent to 89.01 yen. The Dollar hit a 14-year low of 84.82 yen at the end of November as worries about Dubai's debt saw investors unwind risk trades funded in yen, which then sent dollar/yen down. Dollar gains were slowed down following a rally from late last week, when a surprisingly strong reading of U.S. employment had triggered some expectations the Fed may start to normalize ultra-easy monetary policy earlier than expected.

Gains in the U.S. currency were also tempered after Pacific Investment Management Co., which manages the world's biggest bond fund, said that more USD weakness should be expected and declines in its value may help redress global economic imbalances and spur growth in the U.S. economy.