The dollar rose against the euro and the yen on Tuesday on expectations that the advantage it derives from US interest rates will stay intact, and recouped some losses made the previous day on soft US home sales data.
The dollar had lost lose more than 1 percent against the euro on Monday, also pulled down by speculation that an expected rate rise by the European Central Bank at a policy meeting on Thursday could be followed by more tightening next year. But some in the market said there was unlikely to be a succession of ECB rate rises, given sluggish economic growth in the region, and that Monday's selling was a good chance for investors to trim back some long dollar positions.
The Federal Reserve is forecast to bump up rates at its policy meeting in December, followed by another rise in January.
While the Fed could end its tightening campaign after January, the dollar will probably keep its rate advantage as the ECB is unlikely to raise rates more aggressively than the Fed, traders said.
The market widely expects the ECB to boost its key rate by 25 basis points in its first rise in five years. But some investors see a rise of 50 basis points and others forecast successive rate increases beyond this week.
The release of soft US data for existing home sales in October, which some traders said reflected the impact of higher rates, had triggered the dollar's losses on Monday. The dollar was buying around 119.20 yen up 0.37 percent from late US levels but off Monday's peak of 119.94 yen - a 27-month high.
Traders said 120 yen would be hard to clear given a large amount of option-related orders believed to be waiting around that level.
On Monday, the dollar fell as low as around 118.35 yen, and traders see 118 yen as a firm support.
The euro eased to $1.1825 from $1.1850 on Monday it had risen to a three-week high just above $1.19 and sunk as low as around $1.1680.
The dollar rose against the Canadian dollar, trading just under C$1.17 as Canada braces for an election in January after its minority Liberal government lost a vote of confidence in Parliament.
The dollar's failure to clear a key resistance above 120 yen had prompted market players to lock in profits, but the sharp drop offered bargains for Japanese importers and speculators, helping to stem the dollar's slide, traders said.