US government debt prices fell before a two-year Treasury note auction. But traders said a big retreat was unlikely because the Fed meeting — at which the US central bank is expected to say it will buy assets to try to revive growth and avert deflation — is only one week away.
Most currency traders expect the Fed to opt for more quantitative easing next week, but some easing is priced into an already weak dollar. The questions of how much easing the Fed's Open Market Committee does and how fast have kept investors edgy about building more bearish bets on the dollar.
QE essentially involves printing more money, so a flood of dollars on the market would debase the currency's value.
"Everything is dependent on the FOMC and people don't want to take aggressive positions ahead of this very big decision," said Stephan Maier, currency strategist at Unicredit in Milan.
The Fed meets next on Nov. 2-3.
But some investors have begun to reconsider the likelihood of a big burst of QE after comments from Fed officials late on Monday.
Kansas City Fed President Thomas Hoenig called more asset purchases by the central bank a "very dangerous gamble." New York Fed President William Dudley said the US economic context would determine whether an incremental or sizable approach to asset purchases was better.
"I think it's still possible that QE II is not a done deal for November, even though the market has been trading as if it is," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
"This is one of the last bullets the Fed has in its gun and it's going to be very reluctant to fire it unless circumstances are really dire. It might be put off until the first quarter. I think the market has started to consider that this week."
The dollar was up against major currencies, with the US Dollar Index climbing 0.58 percent at 77.554.
The euro was down 0.66 percent at $1.3871 from a previous session close of $1.3963. Against the Japanese yen, the dollar was up 0.64 percent at 81.30 from a previous session close of 80.780.
The dollar edged away from 15-year lows after Japan's Finance Minister Yoshihiko Noda warned the government would "act decisively" in currency markets if needed.
US stocks were little changed a day after hitting a five-and-a-half month high. Soft commodity prices and disappointing results from the steel sector weighed on materials stocks, but Ford Motor Co. provided a bright spot with stronger-than-expected earnings, sending its shares up 1.6 percent to $14.37.
The Dow Jones Industrial Average was down 5.91 points, or 0.05 percent, at 11,158.14. The Standard & Poor's 500 Index slipped 0.18 point, or 0.02 percent, at 1,185.44. The Nasdaq Composite Index added 8.71 points, or 0.35 percent, at 2,499.56.
Texas Instruments Inc lost 1.6 percent to $28.52 a day after it warned that fourth-quarter revenue will be hurt by slowing demand.
Equities and the dollar have formed an inverse relationship, made sharper by expectations the US Federal Reserve will embark on another round of economic stimulus.
MSCI's all-country world stock index was down 0.42 percent with its emerging market sub-index sustaining a small loss.
The pan-European FTSEurofirst 300 index of top shares closed down 0.2 percent at 1,090.56 points, after rising 0.3 percent on Monday to end near a six-month high.
European equities fell on uncertainty about QE and comments from ArcelorMittal that the basic resources sector faced extended weakness.
Earlier, Japan's Nikkei closed down 0.3 percent, with exporters still in focus because of the strong yen.
In energy and commodities, crude oil rose 0.17 percent to $82.66 per barrel while spot gold rose $2.00, to $13341.40 an ounce.
