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The euro got hit with a double whammy Tuesday and extended its losses against the dollar as the European Central Bank signaled it would step up bond buying in the coming weeks and investors got positive economic news out of the U.S.

The dollar rose 1.7% against the common currency, with one euro buying $1.1119. The euro, which retreated 1.2% on Monday, slid to its lowest level in a week.

The moves helped reverse some of the euro’s big gains versus the dollar since mid-April. Earlier in the year, the euro hit a 12-year low against the dollar and eurozone government bond prices hit record highs on the back of the ECB’s stimulus measures. But the sheer size of bets on further weakness in the euro and more bond-market gains made the markets vulnerable to a sharp turnaround when Europe’s economy showed better-than-expected performance and U.S. indicators signaled softness.

The euro had strengthened 8.3% from April 13 to mid-May, reaching a three-month high against the dollar on Friday. Yields on 10-year German debt have soared from a record closing low of 0.073% on April 20 to 0.612% on Tuesday. When bond prices fall, yields rise.

Benoit Coeure, an ECB executive board member, said the central bank would accelerate moderately its debt purchases in coming weeks in anticipation of less trading activity during the summer-holiday period. In addition, Bank of France Governor Christian Noyer aid the ECB is prepared to take further measures to hit its inflation target, if its current bond-buying program prove insufficient.

“Now we’re receiving a message that high yields and a stronger euro are not what the ECB wants to see right now,” said Shaun Osborne, head of global currency strategy at TD Securities. “The euro is likely to trade on softer footing here.”

The recent weakness in the greenback “has got people interested in going long the dollar again,” Mr. Osborne added.

Expectations that the Federal Reserve was poised to raise short-term benchmark interest rates had sparked a broad rally in the dollar that began about a year ago. But U.S. growth hit a soft patch in the first quarter, prompting investors to re-evaluate their own estimates of when exactly the Fed would increase rates and pare back on their dollar bets. Higher rates make a currency more attractive for investors, and vice versa.

On Tuesday, the outlook for the economy appeared less bleak. U.S. housing starts rose by a bigger-than-expected 20.2% in April from a month earlier to a seasonally adjusted annual rate of 1.135 million, the Commerce Department said. The numbers marked the highest reading since November 2007 and the biggest percentage gain since February 1991. The health of the housing sector influences household spending and net worth.

In other trade, the dollar rose 0.6% against the yen, to Y120.64, highest in five weeks, following the strong U.S. housing data.