The euro rose to a one-month high on Tuesday after European Central Bank President Christine Lagarde said interest rates in the euro zone will likely be in positive territory by the end of the third quarter.
Traders cut short bets on the single currency as Lagarde's comments combined with resilient business activity data boosted appetite for the euro, though gains were capped ahead of the release of minutes from the Federal Reserve's May policy meeting on Wednesday.
"If she is correct in suggesting that rates will no longer be negative in Q3 that potentially means two rate rises over the course of the next 4 months and if you are looking for an economic argument for tightening policy, then today's European PMI numbers were certainly pretty robust," said Stuart Cole, chief macro strategist at Equiti Group in London.
The euro , which was the stand-out gainer on Monday after Lagarde indicated eight-years of negative euro zone interest rates will most likely be over by the end of summer, extended gains.
The single currency was up 0.2% at $1.0707 after she said on Tuesday she saw the ECB's deposit rate at zero or "slightly above" by the end of September, implying an increase of at least 50 basis points from its current level.
The euro fell to a January 2017 low at $1.0349 earlier this month but has since rebounded by 3.6% in seven trading sessions.
The single currency's gains pushed the dollar to a fresh one-month low as a broad selloff in stock markets failed to boost the US currency's safe haven appeal.
Against a basket of other major currencies , the dollar fell 0.3% to 101.79, its lowest since 26 April .
The risk-sensitive Aussie dollar dipped 0.41% to $0.70815, while the kiwi was 0.46% weaker at $0.6438, a day before the Reserve Bank of New Zealand is widely expected to raise the key rate by half a point.
Broader sentiment remained fleeting, however, with traders prepared to flee from one asset class to another at the first sign of weakness.
An index of currency market volatility held firm at 9.6%, not far from a two-year high above 10.5% hit earlier this month.