The dollar slipped against the yen on Tuesday, paring sharp gains made the previous day on expectations that a planned U.S. stimulus package would help the faltering economy. The euro hovered close to a three-week low against the dollar on speculation that interest rates in the euro zone will continue to be lowered after data showed slowing inflation in Spain and Italy. The dollar came under selling pressure as investors were hesitant to build dollar long positions further while a proposed U.S. economic stimulus package remains in the planning stages. The U.S. currency hit a nearly one-month high against the yen on Monday as investors cheered the plans which include up to $310 billion in tax cuts. "There are expectations for the new administration's economic measures such as possible big tax cuts, and this may underpin the dollar in the near term," said Yuji Saito, head of the FX sales department at Societe Generale. "But the economic package has not yet been endorsed, so investors are cautious about buying the dollar aggressively," he said. The dollar fell 0.4 percent from late New York trade on Monday to 93.13 yen. The U.S. currency had risen as high as 93.59 yen on trading platform EBS in U.S. trade, its highest since early December. The U.S. currency tumbled to near 87 yen in mid-December, its lowest in more than 13 years, after drastic interest rate cuts by the Federal Reserve. Some analysts said hopes for the U.S. stimulus package were the sole driver behind the dollar's recent recovery -- hopes that have yet to be borne out by an improvement in the economy. "As you can see from the performance of U.S. stocks, financial markets are not fully convinced that all will be well with the economic package," said Satoshi Okagawa, head of FX forward trading group at Sumitomo Mitsui Banking Corporation. U.S. stocks lost steam on Monday and the Dow Jones industrial average .DJI fell 0.91 percent. The euro faced selling pressure on a growing view that the European Central Bank will keep lowering interest rates, which would reduce the interest rate gap between the euro zone and the United States. "Factors such as data showing weakening inflation in Italy and Spain and recent remarks by ECB Vice President (Lucas) Papademos have raised pressure on the ECB to cut rates, denting the euro," said Societe Generale's Saito. The euro declined 0.3 percent to $1.3598 after falling as low as $1.3546 on EBS on Monday, its lowest since mid-December. Against the yen, the euro dropped 0.6 percent to 126.63 yen. Data on Monday showed that Spanish inflation slowed to a decade low and Italy's annual inflation slowed to a 14-month trough. ECB Vice President Lucas Papademos said on Sunday that more rate cuts may be warranted to shield the euro zone from recession. Investors were looking ahead to U.S. economic indicators including the Institute for Supply Management's non-manufacturing index for December and housing market data for November later on Tuesday. The U.S. Federal Reserve will also release the minutes from its December meeting. "The currency market may be less susceptible to weak data and the dollar may not be sold drastically even if data points to economic weakness as investors will be hopeful about the economic package until at least President-elect Obama takes office," said Okagawa. (Reporting by Kaori Kaneko; Editing by Edwina Gibbs)

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