The U.S. dollar surged into positive territory for 2018 on Tuesday and broke past key levels against several currencies as a divergence between growth and the interest rate outlook versus other countries spurred investors to chase the currency higher.
The dollar, traded against a basket of major currencies, rose 0.59 percent to 92.38, the highest since Jan. 11, when the dollar index hit a high of 92.546. The dollar crossed above its 200-day level of 91.98 for the first time since May 12, 2017, and pushed higher on Tuesday than where it started the year.
"We're pretty much back to where we were at the beginning of the year, so a lot of the dollar weakness has been pretty much wiped out," said Sireen Harajli, foreign exchange strategist at Mizuho in New York.
Knocked by weaker-than-expected economic data and growing doubts about when the European Central Bank will normalize its monetary policy, the euro fell 0.51 percent against the greenback to $1.2015, its lowest level since Jan. 11. The euro was last down 0.61 percent at $1.2003.
Sterling also hit a low of 1.3653 against the dollar, its lowest level against the dollar since Jan. 12, when the British pound traded as low as 1.3532 against the dollar. It last exchanged hands down 1.06 percent against the dollar at 1.3623.
Against the the dollar hit its highest level since Feb 8, when the greenback traded as high as 109.78.
The U.S. economy has shown signs of strength in 2018 that few other developed economies can match.
"The key U.S. dollar driver has been the divergence between economic data in the U.S. and the rest of the world, and U.S. data continues to look comparatively robust," Morgan Stanley said.
Sterling extended losses on Tuesday to below the $1.37 line for the first time in 3-1/2 months after survey data showed British manufacturing growth sliding to a 17-month low.
Markets do not expect a change in interest rates from the Federal Reserve at the conclusion of its meeting on Wednesday, though analysts will be watching for any change in language and any indications that a June hike is likely.
Investors are also focused on Friday's employment report for April for further indications of the strength of the U.S. economy and inflation pressures.
Geopolitical tensions, including around a U.S.-China trade spat, have also subsided in recent weeks to support the dollar.
There was some concerns about the potential for trade wars and the U.S. administrations hard line on China. That seems to have eased a little bit and given markets some sense of comfort, said Harajli.
Traders said relatively illiquid markets because of holidays across much of Europe and parts of Asia had exacerbated moves on Tuesday.
--CNBC's Chloe Aiello contributed to this report.