The dollar pulled up from recent multi-month lows on Monday as investors closed bets on further dollar losses, but uncertainty about the outcome of the US presidential election capped its recovery.
A close race between US President George W. Bush and Democratic Senator John Kerry has heightened worries that deciding the winner of Tuesday's election could drag on as it did in 2000, making investors reluctant to hold the US currency.
Nevertheless, with selling momentum ebbing after last week's fall to six-month lows against the yen and eight-month lows against the euro, the dollar was able to benefit from a mild short-covering rally.
"The prospect of an indecisive election outcome means the market is carrying a big short dollar position and we've seen some short-covering this morning," said Steve Pearson, chief currency strategist at HBOS.
"For the dollar now I don't think it matters who wins as long as someone wins and wins decisively."
After a weak start to trade in Asia, the dollar pushed higher in the European session, scoring its biggest gains against the yen and the Swiss franc. At 1250 GMT, the dollar stood at 106.36 yen and 1.2010 Swiss francs, up over 0.5 percent against both currencies on the day.
The dollar made a less impressive recovery against the euro to stand at $1.2750, less than a cent away from last week's eight-month low of $1.2841 and within firing range of February's record low of $1.2927.
A Reuters/Zogby poll on Monday showed Bush had edged into a one-point national lead over Kerry, setting up a tense final day in an extraordinarily close race for the White House.
Analysts said the neck-and-neck race was discouraging many market players from betting on who the next US president would be and that any glitches in the voting process, like those seen in the 2000 election, could weigh on the dollar.
US payrolls data on Friday could also be crucial for the dollar as investors look for clues on the sustainability of the US recovery and the prospect for higher US interest rates.