"The dollar`s bias hasn`t meaningfully brightened given deep market skepticism in the Federal Reserve firing an interest rate hike in the near future," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.
"Consequently, the foggy outlook for a Fed rate hike risks undercutting dollar rallies."
Also stemming the yen`s gains was a series of warnings from Japanese Finance Minister Taro Aso that the government would intervene in the currency market. Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, was the latest to sound a market alert on the yen.
Analysts believe Japan will be wary of intervening to offset flows of money into the yen before it hosts a Group of 7 meeting this month, but Tokyo is clearly unhappy with a 14 percent rise in the currency since December.
In late trading, the dollar index .DXY, which tracks the greenback against a basket of six other currencies, shed 0.5 percent to 93.797, moving away from a two-week high of 94.356 set overnight.
Against the yen, the dollar was down 0.8 percent at 108.45 yen JPY= after climbing to a two-week high of 109.37 yen in Asian trading.
"The lack of intervention comments today pretty much helped the yen," said Peter Ng, senior FX trader at Silicon Valley Bank in Santa Clara, California. He cited key technical levels in dollar/yen, with investors eyeing 1.10 yen on the upside, and 107.80 on the downside.
The euro rose 0.5 percent against the dollar to $1.1427 EUR=.
Western Union`s Manimbo said key to the dollar`s performance this week will be the April and May data on retail sales and consumer sentiment due for release on Friday. Forecasts showed a supposed pickup in both numbers which would be consistent with views about an economy recovering after a first quarter slump.
"Any disappointing outcomes would suggest a longer slump for the economy which would keep the Fed at bay, and the dollar at risk of revisiting recent lows," Manimbo said.
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