The dollar fell slightly against the euro and a handful of other currencies on Tuesday, as expectations grew that the European economy would get a boost from an interest rate cut.
Any sign of progress in the European financial crisis tends to help the euro, often at the dollar's expense.
Economists were increasingly expecting that the European Central Bank will cut a key interest rate on Thursday. The expectation helped boost stocks in Europe, which have been rising ever since European leaders announced plans last week for new measures to fight the debt crisis.
The euro also benefited from a drop in borrowing costs for two of the most troubled countries, Spain and Italy. Yields on all major European debt fell, with the biggest drop for Italian two-year debt. Lower yields are a sign of reduced worries about the finances of those governments.
The euro edged up to $1.2610 on Tuesday, with trading light ahead of the Independence Day holiday in the U.S. The euro had closed on Monday at $1.2584.
The dollar was nearly flat vs. the British pound, at $1.5693, compared to $1.5692 on Monday, as the pound was held back by a drop in construction activity in the U.K.
There was more dramatic movement against the Japanese yen, with the dollar rising almost a half-percent to 79.87 yen, from 79.49 on Monday. Analysts say the yen is under pressure because of political issues in Japan, including an unpopular tax being pushed by the prime minister.
The dollar also fell vs. the Swiss franc and Canadian dollar, slipping to 1.0125 Canadian dollars, from 1.0167, and falling to 0.9525 Swiss franc, from 0.9545.