HPM Partners Chief Investment Officer Ben Pace is bullish on the dollar and said the greenback's strength finds support from slight improvement in U.S. economic data and expectations of central bank tightening.
Traders mostly read Tuesday's indications of economic growth as supportive of an interest rate hike. On Friday, Fed Chair Janet Yellen suggested a hike would be appropriate this year if the economy improves. She noted that first quarter weakness was largely transitory, but that it would take several years for rates to return to normal.
U.S. Federal Reserve Vice Chairman Stanley Fischer said Monday in a speech in Israel that market watchers focus too much on the importance of the Fed's first interest rate hike since the process of returning to a more normal level will take a few years.
Richmond Fed President Jeffrey Lacker is scheduled to speak Tuesday evening.
Before the bell, durable goods for April showed a decline of 0.5 percent, roughly in-line with expectations. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.0 percent last month after an upwardly revised 1.5 percent increase in March.
Futures held lower after the report. The U.S. 2-year Treasury yield jumped to 0.64 percent, while the 10-year edged higher to 2.20 percent.
Strength in durable goods boosted the Atlanta Fed's GDP Now reading to 0.8 percent growth, up from 0.7 percent.
Read MoreWhy traders are focused on the bond market this week
Housing data showed improvement. New home sales for April showed an increase of 6.8 percent to a seasonally adjusted annual rate of 517,000, up from the consensus 510,000.
The S&P/Case-Shiller composite index of 20 metropolitan areas gained 5 percent in March on a year-over-year basis, matching February's gain. The March reading topped a Reuters poll of economists that forecast a rise of 4.7 percent.
The Conference Board Consumer Confidence report was 95.4 in May, above the revised April read of 94.3.
Other data reports were less encouraging. Markit's Purchasing Managers Index for the services sectors fell for a third straight month in May to 56.4 from April's final read of 57.4.
The Dallas Manufacturing Index came in at negative 20.8 for May, below expectations and down from last month's read of negative 16 in April. Analysts attributed the poor report to continued weakness in the energy sector.
"The data is piling on here that the narrative is changing here on monetary policy," said Art Hogan, chief market strategist at Wunderlich Securities. "We want to see a stronger economy, yet anytime we get a whiff of good news (the market sells off). All of this (selling today) is in the context of very low volume."
U.S. markets were closed on Monday for Memorial Day. Markets in Germany, France and the U.K. were also closed for other holidays.
European stocks ended lower on Tuesday as investors digested mixed U.S. data and remained on edge over the Greece debt talks.
The country must make a 300 million euro payment to the International Monetary Fund on June 5 ahead of several other large payments due later in the month, for a total of 1.6 billion euros.
Officials said Greece could lump all the payments together into one and avoid default.
Earlier, several senior Greek officials said the country urgently needs aid in order to make the June 5 deadline, Reuters said. However, a senior German official said on Tuesday there was no reason to believe Greece would be in default after that date.