The dollar fell against the euro and a basket of currencies on Tuesday as traders closed out some positions before the year-end and ahead of data on the U.S. housing market and consumer confidence later in the day.
The dollar continued to be weighed down and the euro supported by the contrast of aggressive monetary easing in the United States versus a more cautious European Central Bank.
Some market participants cited the ongoing attacks against Hamas in Gaza by Israel, which it says is aimed at halting rocket attacks by Gazan militants, as hurting the dollar, while supporting the Swiss franc near a five-month high.
Meanwhile, sterling continued its downtrend, hitting a 6-1/2 year low against the dollar and hovering near record lows in sight of parity against the euro on prospects of UK interest rates being slashed further on expectations of a deep economic downturn.
By 1135 GMT, the euro was up 1.3 percent on the day at $1.4164 according to Reuters data.
"The euro has been gaining at the dollar's expense where sentiment has turned dollar negative as the U.S. Federal Reserve takes on quantitative easing," said Neil Mellor, currency strategist at Bank of New York Mellon in London.
The euro's gains were spurred after the dollar's inability to hold onto gains in previous sessions.
"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."
The dollar slipped roughly one percent against a basket of currencies to 80.540.
U.S. interest rates are close to zero and policymakers have said they are ready to take more unconventional steps of providing liquidity to bolster the moribund economy.
In contrast, key interest rates in the euro zone stand at 2.5 percent, and policymakers have been unclear about how much rates will be cut further in the near future.
European Central Bank Governing Council member Ewald Nowotny on Tuesday told German newspaper Die Zeit that there is a lot of uncertainty about the region's economic outlook, and that the ECB is prepared to act quickly if needed.
EURO NEAR 98 PENCE
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 fell 0.4 percent to 1.0544 Swiss francs. On Monday, it 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, inching lower to 87.13 yen hit earlier in the month, its weakest since mid-1995.
Data on the U.S. housing market, the epicentre of the year-long recession, will be out later in the day. Case/Shiller home prices are expected to show a 1.8 percent decline, a repeat of the previous month's drop.
Separately, consumer confidence in December is expected to improve slightly, while a reading of factory activity by the Institute of Supply Management Chicago is expected to worsen. (Additional reporting by Naomi Tajitsu)
