The euro held slightly below three week highs against the U.S. dollar on Tuesday, following a strong rally on Monday, as investors waited on Thursday's highly anticipated European Central Bank (ECB) meeting.
The euro gained on Monday after Italian Prime Minister Matteo Renzi's loss in a referendum over constitutional reform was viewed by traders as expected.
Investors are now focusing on the possibility that the ECB may take a more hawkish turn, even as it is widely expected to extend its bond purchase program.
"The short-term market is still short euros and I think they might be nervous - time to square up a little bit more ahead of the ECB meeting," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
The euro has retraced some of its weakness in recent weeks as investors see its fall as overdone and as fears that Italy will look to leave the euro zone in the near-term ease.
The euro had weakened since May on concerns about the stability of the euro zone region and on dovish central bank policy, while the greenback has gained on expectations of solid U.S. growth.
The surprise election of Donald Trump as U.S. President on Nov. 8 accelerated the dollar strength move, which many investors see now as having run too far in the near-term.
"You had a big move and now you have a little bit of a correction," Chandler said.
The euro was last down 0.49 percent against the U.S. dollar at $1.071, after rising to a three week high of $1.0796 on Monday.
The , which measures the greenback against a basket of six major currencies, rose 0.43 percent to 100.51, after dropping to 99.849 on Monday, the lowest since Nov. 15.
The Australian dollar also fell on Tuesday after its central bank struck a cautious note on the economy as it kept interest rates on hold.
The Aussie fell 0.24 percent to $0.7454.