- Dollar index trades below previous day's five-month high
- Euro eases but remains above six-month lows set on Monday
- Near-term focus on Fed minutes due Wednesday
The dollar retreated on Tuesday after six straight days of gains, as U.S. Treasury yields dipped and investors looked for fresh incentives to buy the currency in the wake of its nearly 7 percent rally since mid-February.
The dollar's recent uptrend has been supported by generally upbeat U.S. economic data that has kept the Federal Reserve on track to raise interest rates at least two more times this year. In contrast, other major central banks such as the Bank of Japan and European Central Bank are not in a tightening mode.
"The U.S. dollar may require a fresh dose of catalysts to sustain its nascent resurgence," said Mazen Issa, senior FX strategist at TD Securities in New York.
"Against a backdrop of higher rates, including the overly-emphasized 3 percent mark in U.S. 10-year yields and a very fully-priced Fed, the dollar may have exhausted the divergence narrative," he added.
The divergence referred to the difference in monetary policies between the Fed and other central banks, which has been a major prop for the dollar.
In late trading, the dollar index was down 0.11 percent at 93.57, after hitting a five-month high on Monday. The index, which measures the dollar against a basket of currencies, was on track for its largest daily loss in two weeks.
The dollar was supported on Monday on signs that the United States and China were making progress to resolve their trade conflict. On Tuesday, China said it would cut import tariffs for automobiles, opening greater access to the worlds largest auto market, in a further sign of easing trade tensions.
"U.S. Treasury yields pulled back from last week's seven-year highs, encouraging traders to cash in bullish dollar bets," said Gavin Friend, senior markets strategist at NAB in London.
U.S. 10-year yields still traded above 3 percent on Tuesday. Investors are now looking to the release on Wednesday of the Fed's minutes from its most recent meeting and analysts said there could be inflationary overtones.
James Chen, head of research at Forex.com in Bedminster, New Jersey, said a key level to watch on the dollar index amid the Fed's minutes is the 94.00 resistance level.
"Any hawkish interpretation of the minutes could prompt a breakout above that level, which could then open the way towards the 95.00 handle and above," Chen said.
"To the downside, any dovish interpretation could prompt a pullback towards the 92.50 support area once again," he added
In other currency pairs, the euro dipped 0.08 percent against the dollar to $1.178 amid political uncertainty in Italy.
The country's anti-establishment 5-Star Movement and the far-right League on Monday proposed Giuseppe Conte as prime minister to lead their coalition government.
The dollar, meanwhile, slipped 0.14 percent against the to 110.88 yen, after touching a four-month peak on Monday.