The dollar stabilized after hitting a monthly low against a basket of major currencies on Tuesday.
Major European currencies have rallied in recent days amid speculation that policy makers across the Atlantic will combat inflation by raising interest rates sooner than expected.
Also, successful bond auctions by Spain and Portugal have suggested the nations may not require expensive bailouts, giving the euro a significant boost. Still, the dollar seems to have been oversold, generating some value buying on Tuesday.
The buck slipped to $1.3462 versus the euro — its lowest since December 13 — but battled back to $1.3360 by mid-day.
German economic sentiment index climbed to a six-month high in January, according to the Mannheim-based Centre for European Economic Research, or ZEW.
Early losses were even more pronounced versus the sterling, with the dollar dropping to a two-month low of $1.6059 before picking up a penny to $1.5960.
British annual inflation accelerated further to an eight-month high in December, boosted by food and fuel prices. Inflation is expected to exceed 4% with the increase in sales tax, adding more pressure on the Bank of England to raise rates.
The dollar snapped back from a more than 2-year low against its Canadian counterpart, rising to C$0.9930 from C$0.9837.
Gains occurred after the Bank of Canada held its overnight target rate unchanged at 1 percent, citing concerns about the recent rise of the loonie.
The dollar was little changed at Y82.75 versus the yen.
In economic news from the US, conditions for New York manufacturers continued to improve in January, according to a report released by the Federal Reserve Bank of New York on Tuesday, with the index of regional manufacturing activity rising roughly in line with economist estimates.
The New York Fed said its general business conditions index rose to 11.9 in January from a revised 9.9 in December, with a positive reading indicating growth in regional manufacturing activity.
Later, the National Association of Home Builders released a report showing that its index of homebuilder confidence remained unchanged at a relatively low level for a third consecutive month.
Later this week additional data points should provide clues about whether the housing market can finally sustain a recovery from the devastating 2008 credit crash.