The dollar fell against the euro and yen after the release of weaker-than-expected U.S.
services sector data, raising concerns about economic growth and the prospect of lower interest rates.
The Institute for Supply Management's non-manufacturing index fell to 52.4 in March, below even the lowest of 85 estimates in a Reuters survey and the lowest in four years.
The dollar had earlier pared some losses against the euro after Iran said it intends to release 15 British sailors and Marines held captive for more than a week, but those gains were quickly erased after the ISM report.
"The ISM report was certainly disappointing and overall the data is dollar negative," said Omer Esiner, a market analyst at Ruesch International in Washington.
"The foreign exchange market is now preoccupied with the jobs report on Friday and until then we are probably going to see the dollar trade range-bound," he added.
In other fresh economic data, new orders at U.S. factories rose a weaker-than-expected 1.0% in February as orders for machinery and metals fell, a Commerce Department report showed.
Traders said volume was less than typical in the lead up to the Easter holiday weekend although there was a flurry of activity on the prospects of release of the UK naval personnel held in Iran, which was seen as positive for the dollar.
"There's a little bit of lessening of risk aversion based on this development," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.
Investors shrugged off an earlier ADP private sector employment report which showed U.S. employers likely added 106,000 jobs in March. Traders had expected there would be more reaction since some investors are making bets ahead of the keenly-watched U.S. non-farm payrolls report on Friday.
Earlier, the Australian dollar fell as much as 0.8% versus the greenback after the Reserve Bank of Australia decided to hold rates steady at 6.25%, disappointing investors who had been banking on an interest rate hike.
But the Aussie quickly recovered to stand steady on the day , about 15 ticks below 10-year highs seen on Monday.
"The Aussie setback has been short-lived as markets correctly assume the RBA rate hike is only delayed but not taken off the table," BNP Paribas said in a research note.
Sterling was little changed against the dollar with investors reluctant to make large bets ahead of the Bank of England's rate decision on Thursday.
The median forecast from economists polled by Reuters last week gave a 25% likelihood of an April hike.
But speculation of another inflation-busting hike has grown since then, with markets pricing in some chance of a quarter-percentage-point rise in Britain this week.
In the United States, in contrast, the next rate move is expected to be a cut in the benchmark overnight federal funds rate from the current 5.25%. The focus is now on economic data for clues on how soon this will come.