The U.S. dollar fell against the euro and yen on Tuesday after a drop in oil prices suggested U.S. inflation would stay low and prevent the Federal Reserve from hiking interest rates at a steady pace this year, while risk aversion also boosted the euro and yen.
Brent crude oil prices fell more than 3 percent on worries about the demand outlook and rising supply, boosting expectations for lower inflation and, in turn, a slower pace of Fed rate hikes. The Fed indicated in December that it expected to hike four times this year.
The dollar fell against the yen after hitting a six-week high on Friday of 121.700 after the Bank of Japan's surprise shift to negative interest rates. The euro hit a session high against the greenback of $1.09400 on Tuesday.
"Weaker oil prices mean interest rates stay lower for longer," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman.
He said that low U.S. inflation, in addition to weakness in other U.S. economic data in areas such as manufacturing and construction spending, were leading market participants to expect the Fed may not be able to raise rates even once in 2016.
Fed rate hikes are expected to strengthen the dollar by driving investment flows into the United States.
Analysts said risk aversion also boosted the euro and yen. Along with sinking oil prices, benchmark 10-year Treasury yields hit 1.871 percent, their lowest level in over nine months, while stock indexes worldwide fell.
"The risk-off bias of the marketplace ... typically favors yen and euro over the dollar," said Richard Franulovich, senior currency strategist at Westpac in New York.
The dollar index, which measures the greenback against a basket of six major currencies, was last 0.18 percent lower at 98.83. The dollar was last 0.8 percent lower against the yen at 119.18 yen, while the euro was last 0.18 percent higher against the dollar at $1.092.
The dollar was last down 0.1 percent against the Swiss franc at 1.02 franc.