The dollar held just above Monday's 10-day low against the euro and the Swiss franc on Tuesday as the market waited for capital flows data showing how the United States is funding its current account deficit.
The closely-watched figures due at 9 a.m. EST on Tuesday are a good measure of foreign appetite for U.S. assets and key indicator of foreign financing of the nation's gaping current account deficit.
Last month they showed an unexpectedly high $81 billion November inflow, boosting the dollar.
Later this week, Federal Reserve chairman Alan Greenspan gives a twice-yearly testimony to congressional committees and markets will be eager to hear if he repeats upbeat comments made in London this month about the outlook for the current account.
"People are focused on the inflows data and Greenspan," said Paul Mackel, currency analyst at ABN AMRO in London.
"Greenspan may very well have a different tone about the deficit. Last time he was on European soil and may have wanted to ease European fears (about the current account deficit leading to a weak dollar) but now he will be facing larger questions."
At 3:40 a.m. EST the dollar traded unchanged on the day at $1.2961 compared with Monday's 10-day low of $1.2989.
Earlier this month, the dollar scored its highest level versus the euro in three months as investors shifted their attention to an upbeat growth picture in the U.S. and prospects for higher interest rates, and away from the structural problem of the current account deficit.
But many analysts believed this rally was only a correction in the dollar's long-term downtrend, fueled by concerns that the U.S. may fail to plug the deficit with foreign investment inflows.
STRUCTURAL OR CYCLICAL
Many analysts believe the dollar is now at a crossroads, pulled in opposite direction by strong growth prospects and persistent imbalances in foreign trade and domestic budget.
"The market is now at a turning point, trying to shift its focus from the structural problem of the U.S. deficits to such cyclical issues as interest rate and growth differentials," said Shogo Nagaya, forex manager at Nomura Trust and Banking.
"The dollar is in a tug-of-war as views are mixed as to which factor will prevail," he said.
Meanwhile, Japan will release preliminary gross domestic product data for October-December early on Wednesday, which could affect the currency market through reactions in the capital markets and share prices, traders said.
The yen traded steady on the day on Tuesday at 105.10 yen per dollar and at 136.29 yen per euro.
In Europe, European Central Bank Governing Council member Christian Noyer said that the euro/dollar rate was "at the limit" of being consistent with fundamentals in an interview with the International Herald Tribune newspaper.
He added that the current euro/dollar rate was not necessarily entrenched for the long term.
Germany's economy unexpectedly shrank in the final quarter of last year, contracting 0.2 percent compared with a forecast of 0.2 percent growth.