- The dollar erased gains on Tuesday, as U.S. bond yields pulled away from recent highs and as the euro strengthened, buoyed by data showing that the euro zone economy enjoyed its best year in a decade in 2017.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was down 0.34% to 89.87 by 08:40 AM ET (13:40 GMT), falling back towards last week’s low of 88.25, its weakest level since December 2014.

The dollar came under renewed selling pressure as U.S. Treasury yields eased after climbing to fresh multi-year highs on Monday, amid growing expectations for major central banks to begin scaling back monetary stimulus.

Investors were also cautious ahead of U.S. President Donald Trump's State of the Union speech and a Federal Reserve policy meeting.

Market participants were awaiting Trump's speech, due later in the day, for anything further he might have to say about the dollar. The president was also expected to outline his much-anticipated infrastructure plan.

The dollar slumped last week after U.S. Treasury Secretary Steven Mnuchin gave a tacit endorsement of a weak currency. Trump later tried to row back from those comments, saying he ultimately wants the dollar to be strong.

The focus was also on the Fed, which was to begin its two-day policy meeting later Tuesday. While the U.S. central bank was not expected to make any changes to monetary policy, the meeting was the last time Janet Yellen would serve as Fed chair before the role is taken over by Jerome Powell.

The euro gained ground, with EUR/USD climbing 0.41% to 1.2432, moving back in the direction of the more than three year peaks of 1.2537 reached last week.

Data from Eurostat on Tuesday confirmed that the recovery in the euro area remains on track, with growth of 2.7% over the course of last year, the strongest in a decade.

The euro zone economy grew 0.6% in the fourth quarter of 2017.

Against the yen, the dollar was lower, with USD/JPY losing 0.24% to trade at 108.69, re-approaching last Friday’s four-and-a-half month low of 108.27.

Sterling rebounded from the day’s lows, with GBP/USD rising 0.43% to 1.4135.The pound had weakened earlier after leaked government papers showed that Britain’s economy would be worse off under all three likely Brexit scenarios.