Sterling has been one of the hottest picks among major currencies since the second half of last year, buoyed by expectations an accelerating economy would prompt the Bank of England to raise interest rates next year.
Some BoE officials have sought to temper such expectations in the past month and data on Tuesday showed Britain's banks last month approved the lowest number of mortgages since August last year.
Sterling later recovered ground, however, to trade just about 0.1 percent weaker on the day above $1.68 and 81 pence per euro.
The dollar fell 0.1 percent against a basket of currencies, extending weakness since the end of last week after another retreat in U.S. bond yields.
A stronger dollar was one of many investment houses' major bets at the start of this year but the U.S. economy has so far failed to deliver the comprehensive pickup that would convince the Federal Reserve it needs to raise dollar returns next year.
U.S. two-year bond yields have fallen around 10 basis points in the past month despite a blip higher at the end of last week, and are less than half their British equivalents.
A raft of U.S. confidence indicators as well as orders for durable goods are due out on Tuesday, starting at 1230 GMT.
The dollar lost almost 0.2 percent against the yen to stand near 102 in early European trade. It fell almost 0.3 percent against the Australian dollar and 0.2 percent against sterling.
The euro held on to most of Monday's gains, largely the result of relief that the EU elections did not deliver a knockout blow to any of the bloc's more fragile, debt-ridden governments.
Traders said a squeeze in short euro positions had given the euro some support overnight as it managed to stay above major technical markers such as its 200-day average against the dollar and 100-day average against the yen.
Prospects of policy action from the European Central Bank at its June 5 meeting have weighed on the common currency in the past few weeks and comments from ECB chief Mario Draghi on Monday reinforced those expectations.
Reuters reported earlier this month that the ECB is preparing a package of policy options for its June meeting. It includes cuts in all its interest rates as well as targeted measures aimed at boosting lending to smaller firms.
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