The dollar rallied on Tuesday after falling for two straight days, benefiting from the euro's decline following weaker-than-expected euro zone data as well as investors adjusting positions ahead of a global central bankers' conference later this week.
Caution and position-squaring ahead of the central bankers' summit in Jackson Hole, Wyoming on Friday boosted the dollar, said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.
He added that the dollar may have been boosted by the view that Fed Chair Janet Yellen may not rule out a rate hike in December despite tame inflation and a less than 40 percent chance that the Fed would do so.
Manimbo said the Fed "does have time on its side with several months yet until its final meeting of the year on Dec. 12-13."
On Tuesday, the U.S. currency was on track to post its largest daily percentage gain in a week against a basket of six major currencies, led by its gains against the euro which fell after an index on German investor confidence fell in August.
The Mannheim-based ZEW research institute said its monthly survey showed its economic sentiment index fell to 10.0 from 17.5 in July. This undershot a Reuters consensus forecast for a fall to 15.0.
Friday's speech by European Central Bank President Mario Draghi is among the set-piece events at the Jackson Hole meeting, although he is not expected to deliver a new policy message.
But with the euro trading at high levels against the dollar, "Draghi may deliver as dovish a message as is possible while leaving the door open to tapering in the coming months," said Craig Erlam, senior market analyst, at OANDA in London.
In mid-afternoon trading, the dollar index rose 0.49 percent against a trade-weighted basket of its currencies to 93.55.
The euro, meanwhile, slid 0.52 percent against the greenback to $1.1752, retracing most of its overnight gains when it posted its biggest single day rise so far this month.
"Our bias in these thin markets is to sell the euro on rallies against the dollar as we think underlying positioning is still quite stretched," said Adam Cole, chief currency strategist at RBC Capital Markets in London.
With speculative bullish bets on the euro still near its biggest in five years, according to latest positioning data, some investors think the euro's strength may likely fade given the central bank's recent cautious stance about the currency.