A strong start to U.S. corporate earnings season also boosted general appetite for risk, traders said, while data showing the U.S. trade deficit widened unexpectedly in May weighed on the dollar.
Sterling, meanwhile, rose after hotter-than-expected inflation data left investors betting that the Bank of England may have to start thinking about higher interest rates.
The dollar is getting hurt across the board today on a combination of things, including better earnings and a wider U.S. trade gap, said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. On the euro, that's ratcheted us back to the upper third of recent ranges.
The euro rose 0.3 percent to $1.2630 EUR= after slipping to a one-week low of $1.2523 in European trade after Moody's Investors Service cut Portugal's rating by two notches.
It began to recover after Greece sold 1.625 billion euros ($2.03 billion) of 6-month T-bills at a better rate than it pays to borrow under an EU/IMF rescue fund.
A strong response to a Spanish debt auction had taken the euro to a two-month high of $1.2723 last Friday.
Traders said euro gains would likely hit offers around $1.2640 from range of players who bought the euro on its way down in earlier European trade.
Earlier, a major U.S. bank was seen protecting a short-term option barrier at $1.25. Asian buyers were also reported in that area.
Sterling rose 0.8 percent to $1.5140 GBP=D4, off a session low beneath $1.50, after quarterly consumer price inflation remained above the Bank of England's 2 percent target rate.
The dollar also fell 0.3 percent to 88.38 yen JPY=, moving further away from gains booked a day ago after Japan's ruling party suffered a stinging defeat in parliamentary elections.
UNWELCOME TRADE REMINDER
A wider-than-expected May U.S. trade deficit also raised some concern about U.S. growth and renewed focus on the United States' own budget concerns, analysts said.
It's a long-term trend that's been out of the spotlight for a while but this reminds everyone that it's a major negative still hanging over the dollar, Dolan said.
Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc, said the number could detract precious percentage points from second-quarter GDP, and in that respect may be mildly negative for the dollar.
However, markets still expect the U.S. economy to outpace its counterparts in Europe and Japan when it comes to growth, which should continue to support the dollar against the euro.
Better-than-expected earnings from Alcoa Inc (AA.N) on Monday helped support that case, and investors are waiting for reports from Intel Corp (INTC.O), JPMorgan Chase (JPM.N) and General Electric (GE.N) this week.
The dollar had recently pulled back from its earlier rally, but we're still in very favorable ranges, said John Doyle, strategist at Tempus Consulting in Washington.
Key resistance for the euro was seen around $1.2687, the trendline from the December high.
While capped by $1.2687, our stance will be negative, Commerzbank technical analysts said in a note to clients. (Additional reporting by Nick Olivari in New York and Neal Armstrong in London; Editing by James Dalgleish)