The dollar stumbled against major currencies overnight after US President Donald Trump's national security advisor Michael Flynn quit under scrutiny over whether he discussed the possibility of lifting US sanctions on Russia before Trump took office.
The dollar index retreated from three-week highs, down over 0.2 percent as Flynn's resignation underscored the persistent unpredicatability of Trump's administration, adding to the air of caution as markets await Federal Reserve Chair Janet Yellen's congressional testimony.
"We're still early into the new administration so we're yet to get details of fiscal strategy and that's going to have an important impact on how the Fed guides policy," said Simon Derrick, chief market strategist with BNY Mellon in London.
Derrick pointed to the conciliatory tone struck by Trump's meeting with Japanese Prime Minister Shinzo Abe over the weekend. Abe said on Tuesday he agreed with Trump that currency issues should be left for the finance leaders of each country to discuss.
"We had a little more detail about the conversation between Trump and Abe and it seems the topic of currency hasn't gone away so that adds a bit of caution to the dollar," he said.
The dollar weakened 0.2 percent to 113.56 yen, off Monday's high of 114.17 but well above a 10-week low of 111.59 yen touched a week ago.
Investors are now waiting to see whether Yellen offers clues to the pace of interest rate increases in her first of two appearances at Senate Banking Panel on Capitol Hill this week.
Yellen will present the U.S. central bank's semi-annual report on monetary policy and the economy in testimony to the Senate Banking Committee on Tuesday, followed by a the semi-annual monetary testimony before the House Financial Committee on Wednesday.
"Overall, the market is looking for three things: is the Fed still thinking about three rate hikes this year? Has anything occurred that could de-rail this expectation? Will Yellen give the markets a reality check by voicing some scepticism about potential fiscal change under President Trump?" Kathleen Brooks, research director at City Index, asked in a note.
Dallas Federal Reserve Bank President Robert Kaplan, a voter this year on the Fed's policy-setting panel, said on Monday in remarks prepared for posting to the Dallas Fed website that the U.S. central bank should act soon to raise rates or risk having to abandon its plan to do so slowly.
Interest rates futures showed investors pricing in only about a 1 in 5 chance the Fed will increase rates at its meeting next month, according to CME Group's FedWatch program.
The dollar also got a lift from Trump's promise last week of a "phenomenal" tax plan that the White House said would include tax cuts for businesses and individuals. The hopes raised by his comments helped lift U.S. stocks to record highs on Monday.
The euro, which has come under pressure in recent sessions on France's election campaign and Greek bailout talks, benefitted from dollar weakness and was up 0.25 percent at $1.0623.
On Monday, the International Monetary Fund's chief Christine Lagarde said Greece would not get a special sweetheart deal but there were solutions to its debt problem.