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The dollar dropped to an eight-week low on Tuesday after an unexpectedly weak U.S. consumer confidence report for April, with investors growing cautious about a Federal Reserve meeting starting later in the day.
That meeting could reinforce the view that the pace of U.S. interest rate increases would be slower than initially thought. The Fed is expected to keep interest rates on hold, but the main focus will be on the statement at the end of its policy meeting on Wednesday.
Worries that the U.S. economy is stalling, following a run of soft data, have seen the dollar lose 4 percent in the past six weeks as expectations of a rate rise in June have faded. But many still expect the Fed to lift rates in September.
A weaker-than-expected U.S. consumer confidence number further undermined the dollar. U.S. consumer confidence unexpectedly slumped in April, according to a private sector report released on Tuesday.
The Conference Board said its index of consumer attitudes fell to 95.2 from an upwardly revised 101.4 in March. Economists were looking for a reading of 102.5.
"The current period of dollar weakness appears to be gaining momentum and accordingly likely has further to run," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. "A test of another 1 percent in dollar weakness is likely in the near-term."
She added, however, that over the medium term, Scotiabank continues to believe U.S. growth and the Fed's tightening policy will favor a stronger dollar.
In mid-morning trading, the dollar index fell 0.7 percent to 96.105 .DXY. It fell as low as 96.078, the weakest level since March 5.
Benefiting from the dollar's weakness, the euro gained 0.8 percent to $1.0971 EUR=. It earlier rose to $1.0973, the highest level since April 6.
The euro was also boosted by hopes cash-strapped Greece could secure extra funding. That followed news Prime Minister Alexis Tsipras had reshuffled his team handling talks with European and IMF lenders, effectively sidelining Finance Minister Yanis Varoufakis.
Tsipras said he was confident of reaching a deal before a meeting of euro zone finance ministers on May 11, a day before Greece must pay 700 million euros to the International Monetary Fund.
The Australian dollar, meanwhile, was the biggest gainer, rising 1.7 percent to US$0.79807, after earlier hitting a three-month high. A rally in iron ore prices raised expectations the Reserve Bank of Australia will not cut rates next week.