The dollar fell against the euro and the yen on Tuesday after a report showed U.S. consumer confidence slipped in March.
The report, which is more sensitive to labor and housing market developments, reinforced fears of a U.S. economic slowdown that could force the Federal Reserve to cut interest rates.
The euro was trading at $1.3358, up 0.2% on the day. The dollar was down 0.2% against the yen at 117.90 yen, slipping from 118.05 yen just before the report came out.
The private Conference Board's March U.S. consumer confidence index fell to 107.2, from a downwardly revised 111.2 in February. Analysts had been expecting a reading of 108.5.
"Seven-month highs in gasoline prices, stock market volatility and the ongoing subprime (mortgage) debacle were the likely factors behind the weaker reading," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
"The dollar is a bit lower here, but I think the focus will quickly turn to (Fed Chairman Ben) Bernanke's ... testimony on Wednesday. Speculation is he will attempt to clarify the Fed's nuanced message from last week's Fed meeting," Simpson said.
Bernanke's appearance before Congress will take place a week after the Fed held its benchmark federal funds rates steady at 5.25% and dropped a reference to the possible need to raise the rate.
Investors are also interested in hearing what Bernanke will say about the wider impact of the subprime mortgage problems during his testimony.
"The weaker housing market is putting pressure on the dollar," said Rafael Martorell, chief dealer at BNP Paribas in New York.
"At the same time, we have the ECB looking for a hike and the market is pricing in euro zone rates of 4% by end-2007, while U.S. rates are seen falling to 4.5%.
That is going to drive euro/dollar higher," he added. The benchmark euro zone rate currently is 3.75%, while the Fed's key federal funds rate is 5.25%.
Upbeat comments from ECB Governing Council members Nicholas Garganas and Klaus Liebscher also supported the euro. The Canadian dollar, meanwhile, was the major gainer, pushing the greenback down 0.4% to C$1.1564, as an election in Quebec knocked the separatist opposition to third place.
Earlier, Garganas said euro zone rates do not seem to have peaked and the ECB may need to act if upside inflation risks appear.
Liebscher, echoing the same sentiment, said the euro zone faced inflation clouds at the end of 2007 and close monitoring of the situation was important.
Meanwhile, in the United States the risk of a Fed rate cut in June has increased. Analysts said there is now a 60%-70% chance the Fed will ease rates this year.
"We all think there's an increasing risk the Fed is going to cut rates, that's creating a bit of uncertainty ... But I don't think the Fed wants to rush into cutting rates dramatically as inflation still is a problem," said Adam Myers, currency strategist at UBS.
Cleveland Federal Reserve President Sandra Pianalto made this clear on Tuesday. She said the Fed was keeping an eye on inflation as it saw a risk that inflation growth will not moderate as much as it had expected.
Investors are now keen to hear what Fed Chairman Ben Bernanke may say about the wider impact of the subprime mortgage problems during his congressional testimony on Wednesday.