The dollar was up against a basket of currencies on Monday as investors unwound some recent short positions following the currency's weakest monthly performance in a decade.
The dollar index, which measures the greenback against a basket of leading currencies, posted a more than 4% decline for July, its biggest monthly drop since September 2010.
The weakness has been tied to market expectations for further easing of U.S. monetary policy, and a lack of agreement among U.S. lawmakers on further fiscal stimulus. Falling U.S. bond yields have also been cited as a factor.
The day's gains may be tied to investors partially moving out of the crowded short position, strategists said.
"Sentiment was overdone," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "The swing in the pendulum of market sentiment hit such an extreme," which allowed for some unwinding of those short positions, he said. "I don't expect it to last long," he added.
The dollar pared gains following weaker-than-expected U.S. economic data. U.S. construction spending fell to a one-year low in June; economists had forecast an increase.
The dollar index was last up 0.5% at 93.836.
Speculators' net shorts on the U.S. dollar have soared to their highest since August 2011 at $24.27 billion, Reuters calculations and U.S. Commodity Futures Trading Commission data show.
Against the Japanese yen, the dollar gained 0.4% to push past the 106-yen-per dollar mark. On Friday, the dollar posted its biggest daily rise against the Japanese currency since March, halting a rally in the yen which saw it gain 3% in July.
Japanese Finance Minister Taro Aso described the yen's recent rise as "rapid" on Friday, signaling concern that a strong currency could do more damage to an export-led economy already in recession.
A growing U.S. fiscal deficit to finance the stimulus prompted Fitch Ratings to revise its outlook on the United States' triple-A rating to negative from stable.
Sentiment on the euro has improved after European Union leaders agreed last month to a 750 billion euro ($882 billion) economic recovery fund while also taking on debt jointly in a show of regional cooperation.
The single currency last traded at $1.1727, down 0.4%. It hit a two-year high of $1.1908 reached last week.