Expectations of higher US interest rates relative to the euro zone pushed the euro to a low of $1.1711 before it recovered to $1.1782, down 0.3 percent from late Monday.
"With a thin data calendar, the market is looking to consolidate," said Charmaine Buskas, foreign exchange analyst with Economy.com in West Chester, Pennsylvania. "That's taking some steam from the dollar."
The euro's swift move overnight to below $1.1747, the currency's launch rate in 1999, had caught many euro bulls by surprise, forcing them to cover their bets against the dollar, traders said.
"The market got a bit short of euros," said John McCarthy, director of foreign exchange trading with ING Capital Markets.
The defence of an option at $1.1700 may provide near-term support, but the euro zone currency had "broken some significant technical levels and we've had some significant capitulation," said Richard Franulovich, senior currency strategist with Westpac Banking Corp.
Medium- to long-term investors who had established bets against the dollar during its three-year decline from 2002 to the start of 2005 have begun to unwind their positions, contributing to the US currency's strength, Franulovich said.
"Anything above $1.18 I would sell aggressively," he added.
The next level of major technical support for the euro lies at $1.1588, UBS said in a note to clients.
Against the yen, the dollar was down 0.3 percent at 117.25 yen, surrendering some of its recent gains.
Since August, the euro has fell nearly 8 cents against the dollar, which has also risen by more than 7 yen in value, primarily due to the favourable US bond yield advantage over yields in the euro zone and Japan.
The spread between 2-year Treasury debt and same-maturity euro zone government paper narrowed Tuesday, contributing to the dollar's slight pullback.
Still, the market is expecting US interest rates to continue rising, while at the same time it is uncertain as to when the European Central Bank will begin to tighten policy.
"Given the likely trajectory of rate differentials, arguably the most important fundamental consideration this year, it is prudent to assume that the bounce in the foreign currencies is simply some position-squaring in an over-extended market," said Marc Chandler, chief global currency strategist with Brown Brothers Harriman, in a research note.
The euro was down 0.6 percent against the yen at 138.12 yen. Against the pound, the euro was down 0.1 percent at 67.61 pence.
The spread of social unrest in France and pressure from European politicians on the European Central Bank not to raise interest rates in a hurry also undermined sentiment in the single currency.
Youths rioted across France overnight, torching more than 1,000 vehicles, despite government plans to impose curfews to quell almost two weeks of unrest.
It's "hard to measure this - but one would suspect that the overnight action (in the euro) was at least partially triggered by the riots," said John Hardy, market strategist at Danish-based Saxo Bank.