The dollar strengthened on Tuesday, its rebound from recent multi-month lows cemented by a report which said the US service sector expanded at a faster-than-expected pace in August.
The Institute for Supply Management's non-manufacturing index climbed to 65.0 from 60.5 in July. Economists had forecast a dip to 59.5. A reading above 50 reflects expansion.
Having recently tumbled in tandem with bond yields in the immediate wake of Hurricane Katrina, analysts said the dollar was primed for a correction higher.
The ISM report came as oil prices continued to ease back from record highs and investors revised their view that the Federal Reserve may pause in its program of steadily raising interest rates in response to Hurricane Katrina.
Late on Tuesday, the euro was down 0.5 percent on the day at $1.2473. The euro had traded as high as $1.2589 on Friday, a three-month high.
The dollar was up 0.4 percent on the day at 109.64 yen and up 0.5 percent at 1.2376 Swiss francs
Sterling was little changed at $1.8427. The pound's downside was limited by talk of mergers and acquisitions-related inflows, which depressed euro/sterling by around 0.5 percent at 67.65 pence.
Sterling traders are also looking ahead to Thursday, when the Bank of England's Monetary Policy Committee is expected to keep benchmark rates on hold at 4.5 percent.
US traders returned to their desks on Tuesday after a long weekend marking the Labour Day holiday on Monday.
The euro was also under pressure from a Financial Times report on Tuesday that China may have sold euros in recent sessions to help limit the yuan's rise against the dollar. Below-consensus euro zone retail sales data for July also weighed on euro sentiment, traders said.
One of the better performers against the dollar on Tuesday was the Canadian dollar. The greenback ended flat at around C$1.1889, with the "loonie" supported by expectations that the Bank of Canada will raise its benchmark interest rate to 2.75 percent from 2.5 percent on Wednesday.
The main focus for traders on Tuesday, however, was the economic fallout from Katrina.
Front-month crude futures traded in New York slid 1.61, or 2.4 percent, to settle at $65.96 a barrel as oil production and refinery operations in the Gulf of Mexico slowly came back online.
The three major US stock indexes all rose on Tuesday.
For a first glimpse of Hurricane Katrina's immediate impact on the US economy, investors were keen to see this week's data on initial jobless claims. Two Fed officials are also due to deliver speeches this week.
The benchmark federal funds rate is currently 3.5 percent after the Fed's 10 consecutive rate hikes since June 2004, which have helped drive the dollar up during the first half of the year.
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