The euro strengthened on Tuesday as debt yields of some peripheral euro zone countries retreated ahead of an EU summit later this week on expectations a solution to Greece's debt problem may be reached.

Traders said official Asian and Russian names bought the euro as yields on Italian and Spanish government bonds eased slightly following a surge higher in the past week on concern the debt crisis is deepening.

The dollar briefly recovered against the yen after a government report showed U.S. housing starts rose more than expected in June to touch a six-month high and permits for future construction unexpectedly increased.

It then fell back as some investors said that one monthly number, however positive and above the consensus, does not make for an improving trend in the nation's housing market. That market remains mired down with foreclosures and a huge inventory of unsold homes.

"There is some lightening of short positions ahead of (the summit) on the risk there could be some sort of agreement reached," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "But an agreement on Thursday could include some form of Greek default, which to me is not necessarily a positive outcome for the euro." more