The dollar edged up from the previous day's record lows versus a basket of major currencies on Tuesday as investors marginally trimmed expectations the Federal Reserve will cut rates this week.
The Fed is widely seen lowering rates by a quarter-point to 4.5 percent on Wednesday to prevent broader damage to the U.S. economy from deterioration in the housing sector.
In recent sessions, some had even started to bet on a larger, half-point move.
But such expectations were doused with cold water on Tuesday after an report by Greg Ip -- the Wall Street Journal's Fed watcher who is known for reflecting the views of senior central bankers -- that a cut this week is no sure thing and officials are not seriously considering a half-point move.
Many people were starting to price in that we were going to get a 50 basis point rate cut ... That easing is now even looking much less likely and some are even saying that the Ip article goes further to suggest to that there will be no cut, said Adam Myers, market strategist at Credit Suisse.
The market was very short U.S. dollars and that's what caused the reaction today.
Fed futures are pricing in an around 88 percent implied chance of a 25 basis point Fed cut on Wednesday, but all bets are now off for a larger move.
By 6:52 a.m., the euro was down 0.2 percent to $1.4390, off a record peak of $1.4438 set on Monday according to Reuters data.
Analysts said the euro was also weighed down by worries that European banks reporting this week could announce bigger than expected write-downs related to troubles in the U.S. subprime mortgage market and the subsequent global credit crunch.
UBS on Tuesday reported its first quarterly loss in five years in the July to September period.
The dollar's trade-weighted index against six major currencies edged up 0.15 percent to 76.952 after having slid to 76.777 on Monday, the lowest in the index's more than 30-year history.
Some market players were also taking profits on winning bets against the dollar and in higher-yielding currencies before the Fed meeting and this week's data on U.S. payrolls, traders said.
Currencies of commodity-producing countries, such as the Australian and Canadian dollars, slipped as recently strong gold and oil fell.
Investors will watch U.S. consumer confidence data at 10:00 a.m. EST and the S&P/Case Shiller housing market report for August at 1400 GMT for further clues on the prospects for interest rates.
The numbers however are likely to be overlooked by markets ahead of the Fed decision on Wednesday.
As the markets almost fully priced in a 25 basis points cut, no change may support the dollar versus European currencies in terms of the interest rate differential. But when such an outcome dents the sentiment in the equity market, the yen may face upward pressure on risk reduction, Citi said in a research note.
Other U.S. data this week includes the first estimate of third-quarter economic growth on Wednesday, manufacturing data on Thursday and the October payrolls report on Friday.
The Bank of Japan also holds a policy meeting on Wednesday at which it is widely expected to hold rates at 0.5 percent.
The yen was steady at 114.68 per dollar.