"There is a whiff of risk aversion about the markets," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto, after most global stock markets, including those in the United States, fell.
Commodities also weakened, with U.S. crude oil futures
In the euro zone, falls in inflation in Spain and several German regions as well as European Central Bank chief Mario Draghi's commitment to continued emergency stimulus initially pushed the euro lower.
Signs that elections in Italy may come as early as September also added to the euro's early pressure.
But the euro recovered as the dollar struggled. The dollar has been soft the past two weeks on concerns over U.S. President Donald Trump's administration.
"Without a doubt, the largest disappointment has come from fiscal policy," said Alessio de Longis, portfolio manager at Oppenheimer Funds in New York, citing an uncertain time frame for the passage of healthcare reform and difficulties facing the border-adjusted tax, which he said met strong resistance in Congress and from important industry lobbies.
"At this stage, we believe any meaningful progress on tax reform seems postponed to next year and, if it does come to bear, will likely be more modest in scope."
In late trading, the dollar index was down 0.1 percent at 97.30 <.DXY>, with the euro up 0.2 percent at $1.1184.
Against the yen, the dollar dropped 0.5 percent to 110.77 yen, after earlier falling to a two-week trough of 110.67. The dollar also slid to a two-week low versus the Swiss franc and was last down 0.4 percent at 0.9745 franc
Tuesday's U.S. data, while mixed, still backed the expectation that the Federal Reserve will raise interest rates next month, analysts said.
Fed Governor Lael Brainard, a voter on the Federal Open Market Committee, said as much on Monday. She said another rate hike was likely soon, although soft inflation numbers could convince the Fed to delay further tightening. She also favors a gradual pace of rate hikes.
Data showed that April U.S. consumer spending recorded its biggest increase in four months, while inflation rebounded. Consumer spending, accounting for more than two-thirds of U.S. economic activity, increased 0.4 percent last month. The so-called core personal consumption expenditure price index, the Fed's preferred inflation measure, also bounced back 0.2 percent.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith Mazzilli and Peter Cooney)
By Gertrude Chavez-Dreyfuss
