The dollar slipped against the euro and a basket of currencies on Tuesday as traders trimmed long positions in the U.S. currency in the last remaining trading days before the year ends.
Sterling took another beating, hitting a 6-1/2 year low against the dollar and closing in on parity versus the euro on the ongoing view that the UK economy will sink deeper into recession in 2009.
Some market participants said the ongoing operation against Hamas in Gaza by Israel, which it says is aimed at halting rocket attacks by Gazan militants, was also helping to dampen dollar sentiment, while supporting the Swiss franc near a five-month high.
The euro rose 1.3 percent on the day to $1.4160 according to Reuters data, recovering from a slide after the U.S. currency's inability to hold onto gains in previous sessions triggered some selling.
"Yesterday's attempt to push past $1.40 to the euro failed, and so those positions are being unwound," said Geoffrey Yu, currency strategist at UBS in London.
"Investors want to be less exposed to the wrong type of positioning heading into the year end so they're clearing out positions."
Others said the dollar was also being pressured lower against currencies including the Swiss franc -- often considered a safe investment during times of geopolitical risk -- as Israel's attack on Gaza entered its fourth day, raising concerns about oil supplies in the region.
The dollar .DXY slipped roughly one percent against a basket of currencies to 80.540.
Sterling fell as low as $1.4385, its weakest since early 2002, according to Reuters data, while the euro rose 1.3 percent to 97.75 pence, hovering near a record high of 98 pence hit on Monday.
The dollar slipped 0.3 percent to 1.0550 Swiss francs. On Monday, the dollar fell to 1.0367 francs, its weakest since late July, after the Israeli attacks had triggered so-called "safe-haven" demand for the Swiss currency and gold.
The dollar slipped 0.4 percent to 90.21 yen, hovering not far from 87.13 yen hit earlier in the month, its weakest since mid-1995.
The yen has rallied dramatically since August, pushing the dollar down nearly 19 percent since the start of the year as the meltdown in the financial market triggered an exodus out of yen carry trades, in which the low-yielding Japanese currency had been used to buy assets in higher-yielding currencies.
Despite its losses against the yen, extreme risk aversion has boosted the U.S. currency this year, while pushing higher-yielding currencies like the Australian and New Zealand dollars down roughly around 20-25 percent each.
The dollar's gains against the euro have been more subdued, as the single currency has slipped around 3 percent, while the dollar index has risen around 5 percent.
With little major data or events due in the European session on Tuesday, investors awaited a release from the Institute of Supply Management Chicago on manufacturing activity, which is expected to fall this month, underlining further deterioration in the U.S. economy.
