The dollar rose against the euro on Tuesday, retreating from the previous session's six-week lows as investors focused on the potential for rising U.S. interest rates and on weak German employment data.
U.S. 10-year yields were hovering near three-month highs on Tuesday after strong inflation and manufacturing data on Monday fueled expectations of higher U.S. interest rates, which would widen the rate differential between the U.S. and the euro zone.
The euro was also undermined by unofficial data showing the number of Germans out of work rose to a new post-war record in February.
"People are getting more bullish about the Fed raising rates in March and May," said Adam Myers, currency strategist at Societe Generale in London.
"The fact that German unemployment is at a record is enough to force the euro lower."
The euro dropped a third of a percent to $1.3189 by 3:35 a.m. EST, nearly a cent below six-week highs set on Monday. The dollar was steady at 104.70 yen.
The German seasonally-adjusted jobless rate rose to 11.7 percent in February, the Federal Labour office said, and the unadjusted jobless total rose to 5.216 million. on Monday that the unadjusted jobless total increased to a post-war record.
First estimates of euro zone inflation for February are due at 5 a.m. EST, and are forecast to show year-on-year inflation at 2.10 percent, unchanged from January.
The yen also strengthened by a quarter percent to one-week highs against the euro, recovering from two-month lows set on Monday, after data showed unemployment in Japan stayed at a six-year low while household spending jumped.
The yen has rebounded this week as data suggest Japan's economy is pulling out of last year's mild recession, while a warning from the Bank of Japan chief on Monday reminded markets that zero interest rates will end at some point.
"All the data have come out strong," said Jake Moore, forex strategist at Barclays Capital in Tokyo. "The numbers have been better than they have been for a few months, so it looks like the yen is set for more strength."
The dollar also climbed against the Australian dollar after Australia posted a record current account deficit in the fourth quarter of 2004, showing the structural imbalances which many analysts see as a negative for the dollar are not confined to the United States alone.
The Australian dollar quickly succumbed to its U.S. counterpart, falling more than 0.5 percent to US$0.7877.