The dollar gained across the board on Tuesday as oil prices retreated, although fears persisted in the market that high crude costs will depress the yen as Japan's economy relies heavily on imported energy.
US crude oil prices, a key driver in the currency markets, ended lower on Tuesday just above $58 per barrel on profit-taking, after hitting an all-time high of more than $60 this week. Still, oil has risen nearly 30 percent in just over a month on concerns about global strains on production and refining capacity.
Late in New York, the dollar traded around 109.96 yen up 0.7 percent from late Monday. Earlier, it climbed as high as 110.07 yen, according to Reuters data, an 8-1/2-month high.
Kathy Lien, chief fundamental analyst at Forex Capital Markets in New York, attributed the dollar's gains to softer oil prices. "Oil prices are very significant to the global economy and definitely they have ramifications for consumer spending. Everyone is breathing a sigh of relief because oil prices are retracing," she added.
The dollar was also bolstered by an anticipated US interest rate increase from the Federal Reserve this week that would boost the currency's yield appeal. The euro was down 0.8 percent at $1.2053, having hit a 10-month low below $1.20 last week.
The dollar rose more than 1 percent against the Swiss franc to 1.2810 francs, while sterling fell 0.8 percent against the dollar to $1.8143.
Analysts, however, expect the dollar to trade in fairly narrow ranges in the coming weeks as liquidity thins due to the summer season.
"My own personal barometer of market liquidity -- traffic during rush hour. It's very light and tells me that vacations have already started," said Andrew Busch, global foreign exchange strategist at Harris Nesbitt in Chicago.
"And that means that unless there is a reason to be trading (news event or economic statistic), activity will be subdued, although the dollar uptrend is still in place," he added.
Also on Tuesday, US Treasury Secretary John Snow said on CNBC television that record high oil prices are hurting the US economy but not enough to halt or reverse the recovery. His comments, however, had little market impact.
The euro was also derailed against the dollar, after a survey by the GfK research group showed German consumer sentiment will likely worsen significantly in July because of anxiety over an expected September election and fears about potential costs a new government could impose.
"Mixed numbers in Europe are illustrating headwinds" for the euro zone economy, said Alex Beuzelin, senior market analyst at Ruesch International in Washington D.C..
That contrasts with the United States, where the Conference Board said its US consumer confidence index rose to 105.8 in June from an upwardly revised 103.1 in May.
The market is also focused on the Federal Reserve's interest-rate setting meeting on Wednesday and Thursday.