By Karen Brettell
NEW YORK (Reuters) - The dollar was slightly weaker against the euro on Tuesday as investors squared positions after a three week greenback rally, and before three days of heavy data culminating in Friday's employment report for September.
Stronger U.S. data along with the prospect of U.S. tax cuts and the likelihood of a further interest rate hike in December have boosted the U.S. currency in recent weeks.
"We have seen three consecutive weeks of rallies in the broader dollar index so I do think that markets are squaring up a little bit ahead of a pretty heavy data calendar," said Mark McCormick (NYSE:MKC), North American head of FX strategy at TD Securities in Toronto.
The euro
The euro was partially supported by large option expiries on Tuesday that put a floor under the single currency. About $4 billion worth of currency options was expiring between the 1.1750 to 1.18 levels on Tuesday. [TGM2369]
Traders and investors were also looking to add bets on possible divergence between the monetary policy outlooks in the United States and Europe, with expectations growing that the European Central Bank will adopt a more cautious stance.
"I don't think the market is pricing how cautious they are likely to continue to be and that will be reiterated by (European Central Bank chief) Mario Draghi on Wednesday," said Martin Arnold, a macro-strategist at ETF Securities in London.
The unexpected outcome of the German election on Sept. 24 and Sunday's violence-marred independence referendum in the Spanish region of Catalonia has also put the brakes on euro-bullish trades, with markets increasingly looking for the single currency
The dollar made further gains the yen and is expected to continue to strengthen against the Japanese currency after eroding its downtrend that had been in place since January this year, said Commerzbank (DE:CBKG).
Technical analyst Karen Jones said in a report on Tuesday that the dollar is now likely to strengthen to around 114.38 – 115.04 yen, from 112.80 yen currently <JPY=>.