Solid economic data last week has offered the US currency a respite from a wave of selling that had pushed it to a record low versus the euro last month, and the possibility that the Fed may not cut rates from 5.25 percent later this year has prompted investors to pare back short dollar positions.
''There's a feeling that the recent dollar selling has gone too far, so we're seeing some short covering,'' said Takehiko Jimbo, forex manager at Mitsubishi UFJ Trust and Banking.
The euro was little changed early today, trading at $1.3460 after sliding to $1.3436 on electronic trading platform EBS yesterday, its lowest since early April.
Given a build-up in long euro positions -- bets that the currency will appreciate -- to a record high this month, market participants said traders were hesitant about pushing the single currency higher, particularly as short dollar positions have been cut.
The dollar was also little changed at 121.50 yen following a climb up to a three-month high of 121.63 yen in the previous session as investors continued to dump the Japanese currency due to its low yield of 0.5 percent.
But traders said a further rise in the dollar/yen may be tricky in the near term because of resistance around 122 yen, a key psychological level as it was near 122.20 yen hit earlier in the year, its highest since December 2002.
The single currency was at 163.45 yen after inching up to a record high of 163.94 yen on Monday.
Market participants expect currency movements to be limited on Tuesday before two-day U.S.-China economic talks set to start later in the day as traders wanted to see if Washington will keep up pressure on Beijing to let the yuan appreciate more.
On Friday, China's central bank widened the daily band in which it allows its currency to trade, in addition to raising both its lending and bank deposit rates.
Washington has long complained that a weak Chinese currency gives the country an unfair trade advantage.
REUTERS KK PM0610