LONDON: The euro retreated from its two-year high on Tuesday as dollar sales declined before a two-day Federal Reserve meeting, during which investors expect its outlook will be reaffirmed.
No monetary policy changes are likely, but traders are speculating about a change in emphasis in the Fed's forward guidance at the meeting, which starts on Tuesday.
Some dollar weakness came amid political wrangling over the next US fiscal rescue package.
The Republican leadership of the US Senate introduced a proposal for the next coronavirus relief package, a $1 trillion plan called the Heals Act.
But concerns remained over the details and the fact that it looked a lot less of a booster than the Heroes Act that passed the Democratic-controlled House of Representatives in May.
The proposal sparked immediate opposition, with the Democrats claiming it was too limited.
"The notable highlight, which will reinforce concerns over the outlook for the US economy, was the plan to cut the unemployment claim support from $600 to $200 per week, a larger cut than originally reported," said Derek Halpenny, head of research at MUFG.
"Delay in getting a deal agreed will cause unavoidable damage to the real economy, given the high level of uncertainty it is now creating," Halpenny said.
The euro was last trading down 0.2pc at $1.1732, off the $1.1781 two-year high reached the day before.
"Yesterday's moves were pretty violent and followed moves of a similar magnitude last week," said Stephen Gallo, currency analyst at BMO Capital Markets, adding that there has been "some of the final pre-Fed positions adjusted into the early part of the Asian session today."
The Japanese yen rose 0.2pc versus the US dollar to 105.18, while the British pound slipped 0.1pc against the greenback to $1.2868.
The New Zealand dollar fell the most against the greenback, sliding 0.6pc to 0.6644.
The dollar had been tumbling since May and was dumped in recent days as flaws in the US coronavirus recovery and crumbling yields sent investors elsewhere.
Most analysts say the reasons for the dollar's decline, especially falling real yields, remain intact, but the pace of the drop probably warranted a pause - particularly with a Fed meeting and a US spending package in the offing.
U.S consumer confidence and manufacturing data due at 1400 GMT will provide further evidence on the US economic recovery.
Traders pushed the cost of one-month euro/dollar options to a four-month high on Tuesday, suggesting money managers were preparing for unexpected moves in the pair in coming weeks.
Elsewhere, the Turkish lira was close to record lows after it plunged 2pc in minutes on Monday before reversing most of that fall.
The lira has fallen about 7pc against the euro in two months.
It was virtually flat against the dollar.