The dollar fell sharply on Tuesday as investors shrugged off mildly positive US housing and consumer confidence data, focusing instead on the impact of high oil prices on the economy.
Traders said the dollar's decline was also heavily influenced by technical factors rather than simply by economic fundamentals, given a strong rally in US stocks on oil prices trading just below recent 21-year highs.
"While growth here (in the United States) remains much more robust than in Europe people are looking at the currency market and saying so much of the good news is already priced into the value of the dollar," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
"People are focusing on the structural issues of the deficit, Iraq and now the high price of oil," he added.
McCarthy and other traders said the euro's losses against the dollar in recent weeks appear to have run their course and the euro's turnaround is now approaching a key technical resistance area of $1.2225. A move above there could provide momentum for more euro gains.
Late in New York, the euro traded up 0.78 percent at $1.2098 below an earlier three-week high, according to Reuters data.
"Markets convincingly took out the $1.2070 to $1.2080 levels, so a lot of stop-loss buying on the dollar has come to the fore," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.
The dollar fell 1.02 percent to 111.72 yen, hovering above the session low of 111.67 yen.
Strong Japanese bank earnings helped support the yen, some analysts said.
Japan's reliance on oil imports and sensitivity to the global growth cycle could cap upside gains in the Japanese currency, they said.
The dollar fell to 1.2723 Swiss francs, while sterling climbed 1.25 percent to $1.8117.
US stocks closed higher, with 1.6 percent gains for the Dow Jones industrial average and S&P 500 and a 2.17 percent gain for the Nasdaq Composite index.
The dollar was hobbled by concerns that near record-high oil prices could choke US economic expansion, and, in turn, demand for the US currency.
NYMEX crude oil futures closed lower on profit-taking on Tuesday, off 60 cents to $41.12 a barrel. NYMEX hit a 21-year trading high of $41.85 on May 17.
The United States is the world's largest consumer of oil, and analysts fear high crude prices may rein in US consumer spending. This could make the Federal Reserve reluctant to raise interest rates from 1 percent, keeping returns on dollar deposits unattractive.
While oil prices have risen dramatically, analysts say that in real terms, adjusted to take inflation into account, the rise could be considered tame. The market is struggling to weigh just how big an impact it will have on the Federal Reserve's thinking about potential interest rate increases.
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