The US dollar initially rose by 0.4% earlier in the day but later erased its gains as traders focused on potential geopolitical tensions in the Middle East and risk aversion in equity markets. The New Zealand dollar strengthened ahead of the Reserve Bank of New Zealand's meeting on Wednesday.

The Bloomberg Dollar Spot Index showed little change.

Asian markets were closed for the Lunar New Year holiday, leading to weaker market liquidity.

Many traders closely monitored talks between the US and Iran that began on Tuesday in Switzerland.

Strategists and traders were also paying attention to the Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) data scheduled for release on Friday.

The New Zealand dollar rose 0.3% against the US dollar to 0.6048, with the Reserve Bank of New Zealand expected to keep interest rates unchanged at its Wednesday meeting.

The US dollar was largely flat against the Canadian dollar at 1.364, following the release of Canadian January CPI data that fell below expectations.

"The US dollar-Canadian dollar pair is currently trading slightly above our fair value estimate of 1.3585, but the Canadian dollar could retreat to the 1.37 range before renewed US dollar selling emerges," said Shaun Osborne, chief foreign exchange strategist at Scotiabank.

The British pound fell 0.5% against the US dollar to 1.3561, its lowest level since February 6.

The UK Office for National Statistics reported on Tuesday that the unemployment rate rose to 5.2% in the last quarter of the year, the highest since early 2021, exceeding economists' forecast of 5.1%.

The yield on 10-year UK government bonds fell 3 basis points to 4.37%, while money markets have now fully priced in a 0.5 percentage point interest rate cut by the end of the year.

The US dollar fell 0.1% against the Japanese yen to 153.289.

The euro was largely unchanged against the US dollar at 1.1848; the euro has declined for six consecutive trading days, marking its longest losing streak since November.

German investor confidence unexpectedly declined in February.

The Australian dollar rose 0.2% against the US dollar to 0.7084; minutes from the Reserve Bank of Australia's monetary policy committee meeting on February 2–3 indicated that the economic outlook had "shifted substantially" when deciding to pivot toward interest rate hikes that month.