The dollar rose on Tuesday from record lows as investors trimmed bets of further declines in the U.S. currency ahead of key economic data later this week.
The greenback had sunk to successive all-time troughs versus both the euro and a basket of major currencies, hurt by signs of a slowdown in the U.S. economy, a 50 basis point Federal Reserve rate cut last month and expectations of more easing to come.
But after such sharp sell-offs, investors took a breather on Tuesday, in part wary that policy-makers may be tiring of such a weak dollar.
A source close to the preparations for a Eurogroup meeting told Reuters that Europe will push for a stronger statement against exchange rate volatility from the Group of Seven rich nations when they meet later this month.
A report on Tuesday showed an index of pending U.S. home sales in August fell to its lowest since 2001, when the history of the data began. However, the dollar strengthened modestly despite the weak housing data, as dealers cashed in bets against the greenback at attractive levels.
The dollar is firmer across the board as profit-taking on short dollar positions gets into full swing, wrote currency strategists with Brown Brothers Harriman in New York in a note to clients. Underlying dollar bearish sentiment has not disappeared but a good deal of it has been priced in.
Fresh clues on the health of the U.S. economy and the need for more rate cuts may come with the September non-farm payrolls on Friday, especially after the August data reflected the first contraction in the job market in four years.
The dollar index, a gauge of the greenback's value against a basket of six major currencies, rose 0.4 percent to 78.288, rebounding from a lifetime low of 77.657 hit on Monday.
The euro was down 0.5 percent at $1.4155, not far from Monday's all-time high of $1.4281, according to Reuters data.
Few analysts believe the dollar's long-term decline has ended or that the troubled U.S. housing sector -- the source of global credit market turmoil -- has turned around. But for now dealers said the bar has been raised for news that can drag the dollar sharply lower.
In general the market is pretty well aware of the housing recession, and so the immediate impact of these kind of numbers is going to become less pronounced going forward, said Dustin Reid, foreign exchange strategist with ABN AMRO in Chicago.
The dollar was steady at 115.80 yen, while the euro shed half a percent to 163.92 yen.
The Australian dollar dropped after it struck an 18-year high against the U.S. dollar this week, falling 1 percent to US$0.8843. The New Zealand dollar also lost one percent versus the greenback.
Apart from economic data and positioning, market participants have been taking notice of increasing jawboning by European policy-makers ahead of the G7 meeting. Many analysts believe European Central Bank President Jean-Claude Trichet's statements on Monday referring to the U.S. government's strong dollar policy could set the stage for a concerted push for stronger language on currencies ahead of the G7 meeting.
(Additional reporting by Kevin Plumberg in New York)