Investing.com - The dollar dropped to two-week lows against a basket of other major currencies on Tuesday, as the release of positive economic reports from the euro zone boosted demand for riskier assets.
EUR/USD rose to three-week highs of 1.2526 before pulling back to 1.2496, up 0.47% for the day.
The euro found support after the ZEW Centre for Economic Research said that its index of German economic sentiment jumped to 34.9 from 11.5 in November. It was the highest reading since May 2014 and easily outstripped forecasts of 20.8.
The data came shortly after research group Markit said its preliminary euro zone manufacturing purchasing managers' index rose to a four-month high of 50.8 in December from 50.1 in November, exceeding expectations for a rise to 50.5.
The preliminary reading of the bloc's services PMI rose to 51.9 this month from 51.1 in November, compared to expectations for an increase to 51.5.
In Germany, preliminary manufacturing PMI rose to a two-month high of 51.2 this month from a final reading of 49.5 in November. Analysts had expected the index to tick up to 50.4.
However, the preliminary reading of the German services PMI slid to a 17-month low of 51.4 from a final reading of 52.1 last month, compared to expectations for an increase to 52.6.
Markit also reported that France's manufacturing PMI fell to 47.9 this month from a final reading of 48.4 in November, while the preliminary reading of the French services PMI improved to four-month high of 49.8 from a final reading of 47.9 last month, and ahead of expectations for 48.3.
The yen reached a one-month peak against the dollar, with USD/JPY down 0.96% to 116.69.
Demand for the safe-haven yen still remained strong ahead of Wednesday's Federal Reserve policy statement, as ongoing speculation over the prospects for a U.S. rate hike next year fuelled expectations that the U.S. central bank could adjust its forward guidance.
Elsewhere, GBP/USD gained 0.40% to 1.5700 even as the Office for National Statistics said the annual rate of consumer price inflation slowed to 1.0% last month from 1.3% in November. It was the lowest rate of inflation since September 2002 and was below forecasts of 1.2%.
USD/CHF declined 0.48% to trade at 0.9609.
The Australian, New Zealand and Canadian dollars were broadly stronger, with AUD/USD climbing 0.54% to 0.8256 and NZD/NZD gaining 0.53% to 0.7785, while USD/CAD slid 0.29% to 1.1637.
Earlier Monday, in the minutes of the Reserve Bank of Australia's December policy meeting, board members reiterated that "the most prudent course was likely to be a period of stability in interest rates."
The commodity-related currencies showed little reaction to earlier data showing that the China HSBC Flash Manufacturing Purchasing Managers' Index swung into contraction territory at 49.5 this month from a reading of 50.0 in November, confounding expectations for a fall to 49.9.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was down 0.53% at 88.25.
Later in the day, the U.S. was to publish reports on building permits and housing starts.