The dollar steadied on Tuesday after two sessions of steep falls, hovering just above a record low against the euro, as investors eyed central bank meetings this week in Europe which could keep overseas yields climbing.
The dollar also hit another 26-year low against sterling, which has been steadily climbing ahead of an expected rise in interest rates by the Bank of England on Thursday.
A quarter point rate rise by the BoE would take UK rates to 5.75 percent, half a percentage point above the Federal Reserve's federal funds rate.
Interest rate and growth differentials continue to conspire against the dollar, said Bank of New York currency strategist Michael Woolfolk. We're seeing an acknowledgment this week that the ECB (European Central Bank) and Bank of England, are, if they are not going to be hiking rates, at least going to be sounding warning bells about hikes.
The ECB also meets on Thursday, and is expected to keep rates on hold, but pave the way for another rate rise by September. Meanwhile most analysts expect the Fed to leave interest rates on hold until late this year.
The euro was down 0.1 percent at 1.3615 in early-morning New York trade, still in sight of a record high just above $1.3680 hit in April. The dollar was flat against the Japanese yen at 122.35 yen.
The dollar fared better against the Swiss franc, rising 0.35 percent to 1.2150 francs after a tame reading in Swiss consumer price inflation earlier in the session.
Sterling on Tuesday hit a 26-year high versus the dollar at $2.0197 ahead of the BoE's policy meeting on Thursday.
In thin trade ahead of the July 4 Independence Day holiday in the United States, the main focus of trade Tuesday is likely to be U.S. pending home sales data for May.
Concerns about the U.S. subprime mortgage market -- amplified over the past week by trouble at two Bear Stearns-managed hedge funds -- have rekindled worries that a slowdown in the U.S. housing market could worsen yet.
A deeper slowdown in the housing market this year could force the Fed to cut interest rates, reducing the attractiveness of the dollar to