The dollar slumped against other major currencies on Tuesday, undermined by a surprisingly weak reading on US consumer sentiment that raised fresh concerns over the outlook for the world's biggest economy.
The unexpectedly sharp tumble in sentiment implies a slow economic recovery, allowing the Federal Reserve to take its time in raising interest rates.
Analysts cite unappealingly low yields on dollar-based assets as one reason for the greenback's two-year slide.
But some traders played down the dollar's fall on Tuesday, seeing it as consolidation after a sharp rally last week.
"I do not expect the overt dollar weakness that we saw today as a result of the consumer confidence number to last or permeate for the rest of the week," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York.
"There was immediate discounting of the consumer confidence number almost soon after it happened. There is a natural pullback in consumer confidence just because of the overwhelming news from all the campaigning for the US presidential primary polls," said Francomano.
He said that during presidential campaigns candidates tend to paint a fairly negative picture of the economy. "This is picked up by the media and the public in general, feeding through these confidence surveys," Francomano added.
By late afternoon in New York, the euro rose to a two-day high of $1.2713 before slipping to $1.2683, still up more than 1 percent against the dollar. The euro touched a three-week low around $1.2450 early on Monday.
Sterling rose more than 1 percent against the dollar to $1.8903. The greenback fell more than 1 percent against the Swiss franc to 1.2413 francs and against the Australian dollar to US $0.7807.
Against the yen, the dollar fell 0.2 percent to 108.17 yen. It hit a three-month high around 109.40 yen on Monday, up 4 percent from 3-1/2-year troughs set two weeks earlier, before pulling back on profit-taking.
The Conference Board's index of consumer confidence dropped to 87.3 in February from 96.4 in January. Analysts had expected a decline, but only to 92.5.
Analysts agreed the Conference Board's consumer sentiment report was just one of many surveys and said it would not change the market's underlying perception of the dollar.
"For a change, we agree with the US Treasury Secretary that this is only one statistic and, seeing it in the context of the big picture, it is not enough to overturn expectations that the economy is cooking," said Carl Weinberg, chief economist at High Frequency Economics.
Treasury Secretary John Snow played down the weak confidence report, saying it is "one statistic among many."
Snow reaffirmed his commitment to a strong dollar policy and said the economy was on a good course. His comments, however, had little impact.
Investors hesitated in recent sessions to place new bets against the dollar after it rose nearly 4 percent last week from record lows against the euro and 3-1/2-year lows versus the yen in a scramble to cover short positions.
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