(Updates prices, adds euro zone data, analyst comment and chart)
The dollar fell to a one-month low on Tuesday against its major peers after U.S. Treasury yields dropped, before regaining some ground as the euro dipped on the back of weak economic data.
The dollar index =USD , which tracks the U.S. unit against a basket of six currencies, was last up 0.04% at 105.63. It fell to 105.35 earlier in the session, the lowest since Sept. 22.
Survey data on Tuesday showed that euro zone business activity took a surprise turn for the worse this month as demand fell in a broad-based downturn across the region, suggesting the bloc may slip into recession.
German data was particularly weak, showing that activity in the services sector contracted while the ongoing slump in manufacturing continued.
The euro EUR=EBS lost ground and was last 0.12% lower at $1.0656, having traded roughly 0.1% higher at $1.0684 before the German and euro zone purchasing managers' index survey data was released.
Global financial markets have been gripped by a surge in U.S. bond yields which on Monday took the all-important 10-year Treasury yield above 5% for the first time since July 2007. The rise in yields pushed the dollar index to an almost one-year high earlier this month.
The yield then dropped sharply on Monday. Analysts said one catalyst was a social media message by prominent hedge fund investor Bill Ackman, saying he had closed out his bet against longer-dated bonds and that geopolitical concerns were a factor. Yields rise as prices fall and vice versa.
"I do think the move lower in yields was a trigger for a sell-off in the dollar," said Jane Foley, head of FX strategy at Rabobank.
Yet Foley said there were reasons to think the dollar could remain buoyant over the coming months, not least the weakness in the euro zone economy.
"The lynchpins of the success of Germany's production sector are now a little bit more wobbly," she said, citing a slowdown in China, higher energy costs, and demographic issues.
The dollar fell against the Japanese yen JPY=EBS , with the currency pair traditionally highly sensitive to changes in U.S. bond yields.
It was last down 0.17% at 149.45 yen, after falling back from around the 150 mark that tends to make traders nervous about possible government intervention to prop up the Japanese currency.
U.S. gross domestic product data is due on Thursday and could trigger more wild swings in bond yields and currency markets.
"The yen will be particularly sensitive to hot U.S. data, especially if it causes Treasuries to blow through what's looking like a key resistance level of 5% or so," said Kyle Rodda, senior financial market analyst at Capital.com.
Britain's pound GBP=D3 was last up just under 0.1% at $1.2258. Data on Tuesday showed that the UK labour market slowed slightly in the three months to August.
The Bank of England is due to set interest rates on Thursday next week, after the Federal Reserve's decision on Wednesday. The European Central Bank's meeting ends this Thursday, with traders expecting all three central banks to hold rates steady.
In cryptocurrency markets, bitcoin BTC=BTSP continued to rise in Asian trading hours to touch $35,198, its highest since May 2022, on speculation that an exchange-traded bitcoin fund is imminent.
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