"People were caught leaning too short against euro. It's just some position squaring," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.
The euro was on track for its biggest one-day gain in over a week as Greece proceeded to adopt the tough measures required by its lenders to obtain cash and avert bankruptcy.
The euro was up 1.1 percent at $1.0940 in late U.S. trading after retesting a near three-month low of $1.0808 set on Monday. It is down 1.7 percent so far this month.
The greenback weakened 0.3 percent to 123.95 yen, swinging from a five-week high of 124.48 in the Asian session.
The yen's reversal followed comments from Bank of Japan Governor Haruhiko Kuroda, who said at an event in Bangkok he expected inflation to meet the central bank's 2 percent inflation target and brushed off the notion more quantitative easing is needed.
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Strength in the euro and yen pushed down the dollar index , which fell 0.7 percent to 97.321 after touching a three-month peak at 98.151 earlier Tuesday.
The pullback in the dollar was compounded by a decline in U.S. Treasuries yields on safe-haven demand for bonds that emerged due to losses in U.S. and European stock prices.
Meanwhile, the gold market stabilized after a steep drop on Monday, helping commodity-linked currencies including the Canadian, New Zealand and Australian dollars.
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But minutes from the Reserve Bank of Australia's latest meeting saw more declines in the Aussie dollar, already at a six-year low.
The Aussie dollar gained 0.8 percent to $0.7426, while the kiwi jumped 1.2 percent to $0.6635.
Spot gold prices held above a five-year low but worries remained that their fall would resume toward $1,000 an ounce due to sluggish Chinese demand and a possible Fed rate hike that would raise the appeal of the dollar.