The single currency rose from 1.5504 to 1.5681 against the dollar on Tuesday as an adviser to the German government said European policy makers may raise borrowing costs as soon as the financial crisis ends together with the release of much higher-than-expected German producer price, suggesting inflation is at a 20-month high although the ZEW's investor sentiment survey declined for the second straight month.

Fed Vice Chairman Donald Kohn said on Tuesday that rates seem to be at the right level to support growth without boosting inflation. But he added that officials must be ready to adjust rates quickly if the outlook changes. Former U.S. Federal Reserve Chairman Alan Greenspan said that the yuan and other major currencies will firm versus the dollar over the long term. Greenspan said the reason for the weakness of the dollar versus the euro is obviously the difference in interest rates.

U.S. producer prices advanced by 0.2%, less than the expectation of a rise of 0.4%, however, core inflation excluding volatile food and energy prices, rose by a larger-than-expected 0.4%.

The British pound rallied from 1.9480 to 1.9720 on speculation the Bank of England may keep rate unchanged in the coming policy meeting. The Bank of Japan kept its borrowing costs on hold at 0.50 % as widely expected on Tuesday. The greenback fell against the Japanese yen from 104.49 to 103.45 on dollar’s broad-based weakness.

Australian dollar rallied to a record high of 0.9619 against U.S. currency. New Zealand dollar also rose from 0.7715 to 0.7774 versus the greenback. U.S. currency weakened against the Canadian dollar form 0.9960 to 0.9874 as crude oil prices rallied to fresh record high of 129.60.

Wednesday will see the release of German Ifo index, the BOE MPC vote outcome, U.K. PSNCR and the FOMC minutes of April 29-30. The Munich-based Ifo institute is forecast to show the business-climate index in Europe's biggest economy fell to 102 in May from 102.4 in April and 104.8 in March while the minutes of the Federal Reserve's April 30 meeting may show policy makers voiced concern that rising commodity prices will fan inflation.