Traders said the dollar also came under pressure due to an article in the Financial Times that touched on the risk of the United States losing its triple-A credit rating and refocused attention on rising U.S. debt issuance.
While the content of the FT opinion piece was unsurprising it added to pressure on the dollar, which was already looking vulnerable on technical charts, traders said.
"I think the market overall wanted to test the (dollar's) downside and the FT story linked well with that trend," said a trader for a Japanese trust bank.
The recent recovery in risk appetite and falls in dollar funding costs point to a decline in market players' demand for dollars, leaving the U.S. currency vulnerable, said Takahide Nagasaki, chief foreign exchange strategist for Daiwa Securities SMBC.
"Concerns related to dollar funding have receded somewhat, and the focus turned towards topics that are negative for the United States such as the fiscal deficit," Nagasaki said.
The dollar index, which measures its performance against a basket of six currencies, hit a four-month low of 81.871 .DXY. After trimming some losses, it was down 0.2 percent on the day at 82.140.
Last week, the dollar index breached support at the 200-day moving average while the euro broke above a similar moving average against the dollar.
In addition, the dollar breached key support against the yen earlier this week, when it fell below the top of the cloud on daily Ichimoku charts.
The euro hit a seven-week high of $1.3722 on trading platform EBS, but after shedding some gains it was up 0.2 percent from late U.S. trading on Tuesday at $1.3674
