The dollar rose broadly Tuesday after oil prices fell and a report showed an unexpected rise in U.S. new home sales in April, boosting expectations the economic slowdown is not as bad as feared.
Meanwhile, data out of Europe raised concerns over the health of the euro zone economy. Demand for the European currency started to dim on news French business confidence slumped to a 2-1/2-year low this month while the forward-looking German GfK index pointed to an unexpected deterioration in consumer morale in June.
The data cast doubts over whether the European Central Bank would contemplate raising interest rates to tame inflation this year.
"Recent data out of Europe doesn't support the euro," said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto. "If the outlook in the region continues to deteriorate, the ECB eventually may have to change its neutral stance on rates and adopt a more dovish tone."
The euro slipped in New York after a report showed U.S. sales of newly constructed single-family homes rose 3.3 percent in April to a 526,000 annual rate, above markets expectations.
In late afternoon trading, the euro was down 0.6 percent at $1.5683. A drop in oil prices from record highs also lifted the dollar as they have moved inversely in recent sessions, analysts said. U.S. crude oil futures fell around $4 Tuesday.
"The dollar appears to be looking at oil prices right now," said Ron Simpson, director of foreign exchange research at Action Economics in Tampa, Florida.
The dollar rose against the Canadian dollar for a fourth day as oil prices declined. US dollar/Canadian dollar last traded up 0.2 percent at 0.9929.
The dollar index gained 0.5 percent to 72.338. The greenback also rose against sterling , pushing the British currency down nearly 0.3 percent to $1.9762.
European Central Bank Talk
ECB Governing Council member Klaus Liebscher said recent data hints at lower euro zone growth this year and next, but it is too soon to say inflation has peaked.
Another ECB governing member, Axel Weber, also on Tuesday said the prospect of an interest rate cut by the ECB this year was "wishful thinking."
While an economic slowdown may be just beginning in the euro zone, in the United States some investors hope the worst is over and the Federal Reserve's steep 3.25 percentage points of rate cuts since September prove sufficient to provide the stimulus needed to reinvigorate the economy.
Other U.S. data releases on Tuesday included the S&P/Case Shiller house price index for March, which showed prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier.
In another report, U.S. consumer confidence plunged unexpectedly to a 16-year low in May amid rising gasoline costs and falling home prices. At the same time, inflation expectations rose to an all-time high of 7.7 percent.
"The consumer confidence report has two components summing up the intensifying dilemma facing the Fed. You've got the index dropping across the board, while the one-year inflation expectation index soars higher," said Ashraf Laidi, chief market analyst at CMC Markets in New York.
"The Fed has two choices -- to be behind the inflation curve or behind the growth curve," he added. "For currency markets, any shift by the Fed toward more hawkishness does not necessary augur well for the dollar, because it's a shift away from growth."
The yen fell across the board as investors took on more risk and borrowed the low yielding Japanese unit to fund purchases of higher yielding currencies.
The dollar gained 0.8 percent against the yen while the yen fell 0.7 percent against the loonie, 0.3 percent against the euro and 0.6 percent against the pound.