The dollar found some support on Monday morning ahead of key US inflation data to be published later in the day.
Dollar bulls were already backing a tick higher in the rate of inflation, but trade was tinged with caution ahead of Wednesday's monetary policy meeting of the Federal Reserve's open market committee (FOMC).
The dollar index, a measure of the US currency's strength relative to a basket of six of its main rivals, climbed 0.2% to 89.238 in early European trade on Monday.
PCE inflation data
At 13.30 London time, the US Bureau of Economic Analysis releases data on personal consumption expenditures (PCE), the Federal Reserve's favoured measure of inflation that takes into account rising prices and consumer spending power.
PCE has lagged the Fed's official inflation target of 2% for many months and stood at 1.5% when last measured in November.
On Monday, traders appeared to be speculating on a move higher and, indeed, analysts have been forecasting December core PCE to tick up to 1.6%.
Fed rate call
Many now believe that the 2% target will be reached this year, but few are of the opinion that the Fed will anticipate this with a rate cut at Wednesday's FOMC meeting.
The meeting is Janet Yellen's last as Fed chair and few fireworks are expected before Jerome Powell takes the helm next month, but the central bank is expected to make at least three rate hikes in 2018 - and some believe that a more aggressive stance is possible as growth remains solid and inflation builds.
"We think that a more aggressive Fed will breathe some life back into the dollar before long," said Oliver Jones at Capital Economics.
"Admittedly, the dollar's latest weakness has come despite a favourable shift in investors’ expectations for monetary policy – the gap between US Treasury yields and government bond yields in other major economies has generally risen in the past few months.
"But we suspect that prospects for policy will ultimately outweigh the other factors which have been dragging the greenback down."
Last week, the dollar index fell to a three-year low of 88.438 - down nearly 3.5% during January - and its worst start to a year in 21 years.
The index is down more than 13% since its cyclical peak in December 2016 - shortly after the Fed made its first of four interest rate hikes that took the main Fed funds rate to its current 1.5%.
On Monday, however, the dollar was higher. The greenback climbed 0.27% to $1.2392 against the euro and was 0.37% higher against the pound at $1.4105. The dollar rose 0.35% to Y108.97 versus Japan's yen.