The dollar extended losses against the euro on Tuesday, tumbling to a session low after data showed U.S. consumer confidence fell to a near 16-year trough.
The euro rose to $1.5609, a session high, from around $1.5575 before the report. The dollar also fell against the yen .
Consumers' increasingly gloomy mood raised concern about the state of the U.S. economy and doubts about the Federal Reserve's ability to raise interest rates later this year.
The Fed began a two-day policy meeting on Tuesday and is expected to leave its benchmark interest rate at 2 percent.
The dollar fell against the euro ealier after strong French consumer data eased worries about the euro zone economy.
Analysts said signs of continued housing weakness and an increasingly gloomy U.S. consumer will make it hard for the Federal Reserve to pave the way for higher interest rates at the close of a two-day policy meeting on Wednesday.
"People had expected tax rebates to lift the U.S. economy and lead it into a sustained recovery, but that story is running into some stiff headwinds," said David Watt, currency strategist at RBC Capital Markets in Toronto.
"It's pretty clear U.S. consumers are retrenching, and in that atmosphere, how hawkish can the Fed really be?"
The biggest monthly rise in French consumer confidence in 4-1/2 years helped boost the euro and strengthened expectations that the European Central Bank will hike interest rates to 4.25 percent next month to combat inflation.
The outlook for the Fed is foggier.
Markets widely expect the U.S. central bank to hold rates at 2 percent this week but will watch to see what clues are offered about the possibility of rate hikes later this year.
Surging energy and food prices have forced other central banks in the developed and developing world to raise rates in recent months, and the ECB is likely to follow suit in July.
But Watt said the Fed "looks completely cornered for now," with the economy going through a protracted slowdown even as inflation pressures rise.
In a note to clients, UBS analysts said they expect "this week's FOMC meeting to disappoint the market's expectation of three U.S. rate hikes before the end of the year."
They said an ECB hike could push the euro back toward the $1.60 area, just below an all-time high set in late April.
"This will also drag euro/yen up as the Bank of Japan, like the Fed, is unlikely to raise interest rates," they wrote.