Dollar falters as mixed US data clouds rate outlook

Scott Barbour | Getty Images

The dollar skidded from three-week highs against the yen and one-week peaks against the euro as a mixed batch of U.S. economic data added to uncertainty about the pace of future interest rate increases.

A better-than-expected report on the U.S. services sector for April was offset by a wider-than-anticipated trade deficit. The dollar initially rallied on the service sector survey, but came crashing back down.

Another report on Tuesday showed the pace of expansion in the U.S. services sector eased from a seven-month high in April on a dip in new business growth.

Fed has done 'right thing': Buffett

The dollar had started to regain ground in the last few days on signs the U.S. economy was beginning to recover after a soft patch earlier in the year.

"May seasonality calls for U.S. dollar gains, but Friday's non-farm payrolls release will be the ultimate determinant of direction," said Christopher Vecchio, currency analyst at, a unit of New York-based FXCM.

"The lingering net-long U.S. dollar positions in the futures market alongside disappointing U.S. economic data from Q1 2015 leave the greenback in a vulnerable place, particularly if the April jobs report disappoints."

Read More Why the dollar rally isn't over

He added that the strength of the labor market was truly the engine of the dollar appreciation since last July.

In late trading, the dollar index fell 0.4 percent to 95.072.

The euro recovered from one-week lows to trade 0.5 percent higher at $1.1195, shrugging off a report that said the International Monetary Fund may cut funding to Greece unless its European partners accept more debt writedowns.

German Finance Minister Wolfgang Schaeuble denied the IMF was insisting on further debt relief, but said the fund had warned that Greece's financial situation was worsening.

Against the yen, the dollar fell 0.3 percent to 119.82 yen, after earlier touching three-week highs.

Data showed on Tuesday that the pace of growth in the U.S. services sector rose to a five-month high in April, lifted by a surge in business activity.

The Institute for Supply Management said its services index rose to 57.8 last month from 56.5 in March.

The report briefly lifted the dollar.

Earlier in the session, data showed that the trade deficit surged to its highest in nearly 6-1/2 years in March as imports rebounded strongly.

The trade gap jumped to $51.4 billion, the largest since October 2008. Economists polled by Reuters had forecast the trade deficit rising to $41.2 billion.