The dollar fell to a six-day low on Tuesday as investors unwound long bets on the currency, anticipating the Federal Reserve may slow the pace of interest rate hikes after this week's meeting.
Some investors are starting to question whether the dollar's run as the best performing major currency will continue into 2019.
Risk-off sentiment on Tuesday lifted the Japanese yen and the Swiss franc but the dollar did not benefit from the flight to safety.
With the prospect of a “dovish rate hike” keeping the dollar in check, the euro on Tuesday rose half a percent to scale $1.14. The single currency has recovered all of its losses from Monday when it was hit by weak euro zone data.
The dollar index was 0.4 percent lower at 96.699, a six-day low.
Markets will scrutinise the Fed’s two-day policy meeting, which starts on Tuesday, for its sense of how the U.S. economy is holding up amid a U.S.-China trade conflict and global financial market volatility.
The yen gained half a percent on the dollar as investors’ fears of slowing global growth increased demand for safety assets. The Swiss franc strengthened by 0.3 percent.
Sterling, which has been heavily sold off in the past few months on Brexit uncertainty, rose 0.7 percent to $1.2706, helped by a weaker dollar and confirmation British Prime Minister Theresa May will seek parliamentary approval for her much-criticised Brexit deal in mid-January.