The dollar was eyeing a fourth monthly loss on Tuesday as investors reckoned that a peak in U.S. interest rates could swing into view as soon as this week's Federal Reserve meeting.
Currency trade was subdued in the lead up to Wednesday's Fed rate decision, and ahead of Bank of England and European Central Bank rate decisions on Thursday, though cautiousness across financial markets lifted the dollar a bit overnight.
After the data showed Spanish inflation was surprisingly hot in January, the euro went up to $1.0913, before the mood shifted back to $1.0851. The common currency is up 1.3 per cent this month and is near a nine-month peak.
The U.S. dollar index is down by 1.3 per cent for January, but it rose 0.3 per cent to 102.19 overnight. The Japanese yen fell by 0.4 per cent overnight, but is poised for its third monthly gain as markets anticipate changes in monetary policy.
The pound and the Australian, New Zealand and Canadian dollars made overnight losses but are set to make monthly gains.
The Aussie fell by 0.7 per cent overnight, but it is up 3.6 per cent for the month so far, at $0.7060. The kiwi, last at $0.6474, is up almost 2 per cent for January.
Tony Sycamore, analyst at brokerage IG Markets in Sydney, said that they're looking a bit tired and that they're rallying against the dollar, with investor caution and month-end dollar buying also contributing to Monday's moves.
Interest-rate futures indicate market expectations for a 25 basis point bp hike from the Federal ReserveFederal Reserve to take the Fed funds rate window to 4.5 per cent -- 4.75 per cent. Pricing suggests two more 25 bp hikes are expected before cuts arrive later in the year.
Chris Weston, head of research at broker Pepperstone in Melbourne said traders will need to marry the tone of the statement and Fed Chair Jerome Powell's press conference with this pricing structure.
In the unlikely event that the Fed give the impression that they could pause after this week's hike, the U.S. dollar could easily sell off and risky assets rally. Ahead of the Fed, traders are waiting for Chinese manufacturing data and Australian retail sales figures later on Tuesday, as well as a preliminary reading for euro zone gross domestic product.
Employment cost data will be closely watched because of the labour market's influence on monetary policy.
It is probably too late to have too much influence on the final size of the widely anticipated 25 bp rate hike that is due to be announced on Wednesday, said NatWest Markets' U.S. rates strategist Jan Nevruzi. The report's results will play a big role in the tone Powell uses in his press conference.