Dollar rebounded strongly from its lowest level of the year against a basket of currencies on Tuesday as weaker-than-expected U.S. consumer confidence data suggested the pace of U.S. economic recovery was not as fast as investors initially expected, increasing demand for dollar and the Japanese yen as safe-haven assets. The ICE U.S. dollar index rose to 78.897 after hitting 78.315, its lowest since December 2008. Furthermore, U.S. Treasury Secretary Timothy Geithner said on Tuesday that the two-day U.S.-China Strategic and Economic Dialogue had produced agreement on key measures for revitalizing global growth. He stated that China will rebalance towards domestic demand-led growth while the U.S. will take steps to sustain and reinforce recent evidence of rising national savings rate and improvement in its balance of trade with the rest of the world.

Although euro hit a 8-week high of 1.4305 versus the dollar in European morning, it tumbled to 1.4130 after the release of U.S. consumer confidence index for July which came in at 46.6 compared to the consensus expectation of 49.0 and the reading of 49.3 in June. The data suggested recovery signs in the U.S. are mixed and consumer sentiment is still fragile and vulnerable due to a difficult job market.

Earlier in the day, the British pound rose to as high as 1.6558 against the greenback in tandem with the Australian dollar on speculation on rising interest rates. However, sterling dropped against the dollar as FTSE-100 closed down more than 1% and data showed U.K. retail sales fell faster than expected in July. U.K. CBI retail sales data came in at a reading of -17 versus economists' forecast of -15. Cable extended intra-day weakness to 1.6390 in New York morning. In addition, a senior U.K. Treasury policymaker said that the threat of deflation has receded and inflation could become a problem once again when the global economy recovers. The pound pared some early losses after these comments.

The Australian dollar earlier rallied to a 10-month high of 0.8339 against the greenback after Australia’s central bank governor said that risks to the economy were now more balanced and warned that low interest rates could inflate a housing bubble, fueling speculation interest rates may rise soon. However, the pair retreated sharply to around 0.8220/25 in New York morning before rebounding as DJI pared most of its intra-day losses and closed down 11.79 points.

The Japanese yen strengthened against euro, sterling and the dollar as a bigger-than-forecast drop in U.S. consumer confidence discouraged Japanese investors from buying higher-yielding assets overseas. Eur/jpy dropped from 135.98 to 132.91, gbp/jpy tumbled from 157.47 to 154.18 while usd/jpy fell from 95.27 to 94.04.

Data to be released on Tuesday include Japan retail sales, New Zealand business confidence, German CPI and HICP, U.S. durable goods orders.