The dollar rose from a two-week low against the yen on Tuesday, as investors brushed off China's stock market turmoil and focused on a possible 2015 U.S. interest rate rike ahead of the start of a Federal Reserve meeting.
The day's major data release for FX markets was British GDP numbers, which showed the world's fifth-largest economy bounced back in the second quarter, helping sterling rise to a five-day high on a trade-weighted basis.
The safe-haven Japanese yen had gained on Monday as Shanghai stocks tumbled 8.5% - their biggest one-day drop in eight years - and commodity prices slid, dragging down European and U.S. shares and dampening demand for the dollar as investors worried about global growth.
Although Chinese equities fell again on Tuesday, the decline was more modest, helping risk appetite to increase a little. Shares elsewhere edged up while yields on safe-haven U.S. bonds rose, lending support to the dollar.
The greenback rose 0.4% to 123.66 yen, up from its low of 123.01 yen on Monday.
"Front-end U.S. yields are slightly higher – I think that's a key driver," said BNP Paribas' global head of FX strategy in London, Steven Saywell. "But what's been driving markets over the last few weeks has been weakness in commodity prices."
"Somewhat ironically, that's been effecting itself on the dollar rather than the commodity currencies themselves, because the Fed is so important that weaker commodity prices are seen delaying a Fed rate hike."
The Fed starts a two-day policy meeting on Tuesday, with a statement due on Wednesday. Some investors expect it to signal that rates will rise as soon as September, while others say slowing growth in China and persistently weak commodity prices will see the central bank hold off until next year.
The dollar was up against most currencies on Tuesday, gaining half a percent against a basket, but was down 0.8% against the New Zealand dollar and 0.4% against its Australian counterpart. Against the euro, the dollar was up 0.6% at $1.1022.
"We're in for a little bit of a wait now that we have just over 24 hours to go until the Fed," BMO Capital Markets' European head of FX strategy, Stephen Gallo, said.
"Yesterday's move in the dollar is a symptom of people not wanting to be over-exposed to the dollar and the fact that the Fed might not be as hawkish ... The long dollar trade is to a degree a risk-on trade."
(Additional reporting by Lisa Twaronite in Tokyo; Editing by Alison Williams)