The U.S. dollar dipped slightly Tuesday against the euro, which was trading at more than $1.31 following an unexpectedly positive report on the German economy, Europe's largest.
It was the second depressed day for the dollar, which made strong gains last week following the euro's Dec. 30 record-high of $1.3667.
In afternoon trading, the 12-nation European currency was at $1.3158, after ending Monday slightly below the $1.31 mark.
The euro strengthened following a report from Germany's ZEW institute, which showed economic expectations rising for the second straight month on indications that domestic demand is increasing.
Fears over the ballooning U.S. trade and budget deficits have fueled the euro's climb from $1.20 in September, but concerns over the persistently sluggish German economy helped the U.S. dollar's rally last week.
The dollar was also aided by strong comments from U.S. Treasury Secretary John Snow on the Bush administration's commitment to a "strong dollar" policy, which some analysts took as a subtle change in tack because he didn't mention that market forces should set the rates, something he has said repeatedly in the past.
But on Monday, Snow told reporters in New York that the policy had not changed, while stressing that the administration is committed to reducing the federal budget and trade deficits.
In other trading Tuesday, the British pound was up to $1.8774 from $1.8752 on Monday, and the U.S. dollar bought 103.92 Japanese yen, down from 104.30 yen in late trading on Monday.