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The dollar softened against a basket of currencies on Tuesday, mirroring a dip in Treasuries yields as investors awaited key U.S. economic data before the Federal Reserve's monetary policy meeting next week.

The dollar index last sat around 105.57, having lost over 0.5% in the previous session as U.S. Treasury yields tumbled.

The greenback found support last week after Fed Chair Jerome Powell said U.S. economic strength might warrant tighter financial conditions, which pushed the benchmark 10-year yield above 5% to its highest since July 2007.

Bitcoin returned the market spotlight with the virtual currency soaring on speculation that the United States could soon approve a bitcoin exchange-traded fund.

Market attention now turns to some of the last bits of U.S. economic data before the Fed's meeting on Oct. 31 - Nov. 1, with the flash purchasing managers' index (PMI) out later on Tuesday and gross domestic product due on Thursday.

The PMI data could set the market expectations ahead of the GDP report, said Matt Simpson, senior market analyst at City Index.

"If the data leans far enough one way it could prompt a strong dollar rally or breakdown with the Fed in a blackout period," he said, referring to the period before the policy meeting in which limits are placed on public communications from central bank officials.

The Fed is expected to hold rates at its meeting next week.

The European Central Bank is also expected to leave interest rates untouched at their meeting on Thursday, after raising its key interest rates 25 basis points in September.

The euro was mostly flat at $1.0665, holding gains against the dollar on Monday.

Meanwhile, the dollar's retreat gave the battered yen some slight relief. The Japanese currency had hit the sensitive 150-level both on Friday and Monday and was last flat against the greenback at 149.77.

Traders see the 150 threshold as a possible line-in-the-sand for Japanese authorities to intervene in the currency market.

However, the data out of the United States this week could have the yen inching back into the danger zone if it comes in strong.

"The yen will be particularly sensitive to hot U.S. data, especially if it causes Treasuries to blow through what's looking like a key resistance level of 5% or so," said Kyle Rodda, senior financial market analyst at Capital.com.

In cryptocurrency markets, bitcoin leapt as much as 14% to a 2-1/2 year high of $34,283.