The dollar was on the defensive and trading by multi-month lows on the euro and a handful of other major currencies on Tuesday, as investors expect U.S. interest rates to fall next year and see that as a signal to sell the dollar in anticipation.

Moves were modest in early Asia trade, but the dollar index had dropped below its 200-day moving average on Monday as a rally in the yuan spurred another round of broad weakness.

The index, which measures the dollar against a basket of six major currencies, fell 1.9% last week alongside a big rally in U.S. Treasures, and lost a further 0.5% overnight to 103.44.

The euro touched a three-month high of $1.0952 on Monday, with a little help from European Central Bank governing member and reliable hawk Pierre Wunsch pushing back against market expectations for rate cuts as soon as April.

The Australian dollar was marginally firmer at $0.6561, just below Monday's three-month high of $0.6564. The New Zealand dollar was steady at $0.6040.

Even the yen rallied to a seven-week high of 148.1 per dollar overnight and steadied at 148.3 on Tuesday.

The yen has been unloved this year, falling 11.6% on the dollar, as U.S. interest rates have climbed while Japan stuck to ultra-easy policy - opening a wide gap between government bond yields. That it has bounced almost 3% in a week has been eye-catching, especially since positioning data showed yen shorts actually jumped last week.

Source: Reuters