Meanwhile, comments from Federal Reserve chairman nominee Ben Bernanke in a UK newspaper fuelled some uncertainty about his future policy agenda.
"The euro gains were very much on the back of the Ifo today. The figures were very unpeat," said Paul Mackel, FX strategist at ABN Amro.
By 1146 GMT the euro traded 0.4 percent up on the day at $1.2033, almost one cent above session lows of $1.1937.
The euro was up 0.4 percent versus the yen at 138.86 yen and the dollar was almost unchanged from Monday's closing levels ar 115.35 yen.
Some traders said the dollar took a brief hit after US President George W. Bush said military action was the last resort after diplomatic efforts to force Syria to cooperate with a United Nations probe on the assassination of former Lebanese Prime Minister Rafik al-Hariri. The comments drew investors attention to geopolitical risks facing the dollar.
The US conference board is due to release October consumer confidence at 1400 GMT. Economists in a Reuters survey expect a median reading of 88.1 compared with 86.6 in September.
Some analysts said the dollar's retreat was driven by comments from Bernanke published by the Times newspaper. The Fed chairman nominee said that US inflation pressures were likely to remain confined to the energy sector.
"The key thing was that Bernanke's comments on inflation concentrated mainly on the energy sector and this was in stark contrast to other Fed officials. He is coming out very much as a dove," said Mansoor Mohi-uddin, chief currency strategist at UBS in London.
However, other analysts said the fact that Bernanke said US monetary policy remained accommodative was dollar-supportive by signalling that more rate hikes were on the cards.
The strong German data highlighted prospects that interest rate differentials between the dollar and the euro could become less supportive of the US currency next year.
So far this year, the dollar has gained more than 10 percent against the euro, after hitting record lows in late 2004, on the back of rising US interest rates.
But the interest rate futures market sees a 40 percent chance of the European Central Bank hiking borrowing costs in December while there is uncertainty about the pace of US monetary tightening.