The dollar fell against most major currencies on Tuesday after a key US inflation gauge showed a tepid reading, reinforcing expectations the Federal Reserve is likely to raise interest rates gradually.
Global investors say a relatively measured approach to monetary tightening by the Fed dims the allure of some dollar-denominated assets, especially short-term deposits.
"The numbers were a little bit softer - income was below expectations, spending was down sharply, and the PCE deflator came in at 1.5. But we knew June to be soft anyway," said Shaun Osborne, chief currency strategist at Scotia Capital in Toronto.
"(It's) a little negative for the dollar, but I think we're holding the range right now, until we get July payrolls on Friday," he added.
In late morning New York trade, the euro rose nearly 0.4 percent against the dollar to $1.2065.
"The fact that we can't get below $1.20 on the euro/dollar has also been weighing on the market. It's a big psychological level. If we get below there or close below there, there would be more bullish momentum on the dollar," said Tim Mazanec, director of foreign exchange, Investors Bank and Trust Co in Boston.
The dollar fell versus the yen to 110.57 yen. Against the Swiss franc, the dollar dropped to 1.2767 francs. Sterling, however, weakened to $1.8235.
Earlier, the US government reported that US personal consumption fell much more sharply than expected by 0.7 percent in June, while personal income rose a mild 0.2 percent.
The annual growth in the core personal consumption expenditures price index, the Fed's favoured measure of inflation, was 1.5 percent, after May's result was revised down to 1.5 percent.
A US survey saying layoffs in the United States rose 8 percent in July from the previous month, and hiring announcements declined, had a slight negative impact on the dollar. But traders say the dollar still has positive momentum going into Friday's July payrolls report.
Earlier in the global day, the dollar shook off recent weakness due to security fears, after a New York Times report said much of the information leading to the raised alerts was three or four years old, analysts said.
Concerns flared at the weekend after the US government raised terror alerts for financial institutions in New York and Washington.
Separately, oil prices rose to fresh highs on Tuesday, with US prices overshooting $44 a barrel at one point after Opec President Purnomo Yusgiantoro said the producers' cartel had no extra oil to supply the world market with immediately and bring prices down.
Dealers blamed some of the yen's earlier weakness on developments in the oil market. Japan is heavily dependent on imported oil and Economics and Financial Services Minister Heizo Takenaka said earlier on Tuesday he would monitor the impact of rising oil prices on the Japanese economy.