The dollar rose from the previous day's record lows on Tuesday, as investors trimmed over-stretched bets against the US currency ahead of key data later this week which may shed light on the need for more interest rate cuts.
The greenback had sunk to repeated all-time troughs versus both the euro and a basket of major currencies, hurt by signs of a slowdown in the US economy, a 50 basis point Federal Reserve rate cut last month and expectations of more easing to come.
But after such sharp sell-offs in the dollar, investors took a breather on Tuesday, in part weary of more rhetoric from eurozone officials who may be getting worried about the effect of the strong euro on exports.
Fresh clues on the health of the US economy and the need for more rate cuts may come from pending home sales data at 1400 GMT, the Institute for Supply Management's non-manufacturing index on Wednesday and non-farm payrolls on Friday.
"The dollar is generally making gains across the board, recovering from extended short positioning and oversold conditions," said Kamal Sharma, currency strategist at Bank of America.
"We are seeing a technical move today and perhaps some positional adjustment ahead of what is promising to be the highlight of the week in the form of the payrolls numbers." The dollar index, a gauge of the greenback's value against a basket of six major currencies, added 0.4 percent to 78.226, rebounding from a lifetime low of 77.660 hit on Monday.
The dollar also got a lift the previous session as investors pared some of their big bets against the US currency while the Dow Jones industrial average posted steep gains. The euro was down 0.5 percent at $1.4163 by 1046 GMT, not far from its all-time high of $1.4281 hit on Monday according to Reuters data.
Many analysts believe European Central Bank President Jean-Claude Trichet's statements on Monday referring to the US government's strong dollar policy could set the stage for a concerted push for stronger language on currencies ahead of the Group of Seven meeting later this month.
Spanish Economy Secretary David Vegara said on Tuesday that volatility in currency markets is causing problems for exporters in eurozone countries. Although equities shrugged off the bad news, in foreign exchange it gave investors the excuse to take profits on riskier but potentially more rewarding carry trades, where purchases of high yielders like sterling or the New Zealand dollar are funded by borrowing in low yielding currencies such as the yen.
The dollar was steady at 115.71 yen, while the euro shed half a percent to 163.93 yen. The Australian dollar dropped after it struck an 18-year high against the US dollar this week, falling 1 percent to US $0.8858. The New Zealand dollar also lost 1 percent versus the greenback. Elsewhere, sterling rose to session highs versus the euro, with traders citing talk of a rescue bid for troubled UK mortgage lender Northern Rock.