By Karen Brettell
NEW YORK (Reuters) - The euro slipped from three-week highs against the U.S. dollar on Tuesday, following a strong rally on Monday, as investors awaited Thursday’s highly anticipated European Central Bank policy meeting.
The euro gained on Monday after Italian Prime Minister Matteo Renzi's loss in a referendum over constitutional reform, something that traders had expected.
Investors are now focusing on the possibility that the ECB may take a more hawkish turn, even as it is widely expected to extend its bond purchase program.
“The short-term market is still short euros and I think they might be nervous - time to square up a little bit more ahead of the ECB meeting,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
The euro has retraced some of its weakness in recent weeks, with investors seeing the move as overdone and as fears ease that Italy will look to leave the euro zone in the near-term.
The renewed weakening of the euro on Tuesday was seen as consolidation after Monday’s strong move, rather than being driven by fundamental factors.
“Such was its size, it was always going to retrace some of it,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York.
The euro had weakened against the dollar in the first half of November, with the surprise election of Donald Trump as U.S. president on Nov. 8 accelerating the move.
The euro has been held back by concerns about the stability of the euro zone and on dovish central bank policy, while the greenback has gained on expectations of solid U.S. growth.
The euro <EUR=> was last down 0.46 percent against the dollar, at $1.0713, after hitting a three-week high of $1.0796 on Monday.
The dollar index <.DXY>, which measures the greenback against a basket of six major currencies, rose 0.41 percent to 100.50, after dropping to 99.849 on Monday, the lowest level since Nov. 15.
The Australian dollar fell on Tuesday after the central bank struck a cautious note on the economy as it kept interest rates on hold.
Australian gross domestic product data due later on Tuesday will next be watched for further indications about the economy’s strength.
“There is some risk of a negative print,” said Westpac’s Franulovich.
The Aussie <AUD=> fell 0.24 percent to $0.7456.
(Editing by Nick Zieminski and Leslie Adler)