The Saudi riyal rose to a fresh 21-year high against the dollar on Tuesday on continued speculation that Riyadh will soon revalue its currency.

The Saudi central bank told Reuters last week it will not follow the US Federal Reserve's decision to cut interest rates, fueling speculation the world's largest oil exporter might abandon its currency peg.

This speculation pushed the US dollar down to 3.7366 riyals on Tuesday, according to Reuters data, its lowest since December 1986.

Meanwhile, the dollar drifted higher against European currencies on Tuesday, after steep losses in previous sessions, as investors awaited US data to determine how deeply the global credit crunch has affected the economy.

The euro showed little reaction after the German Ifo business confidence report for September came in slightly weaker than expected. The business climate index was at 104.2, compared with a forecast of 105.0, and down from 105.8 in August.

The dollar made particular gains against sterling after a report in a British newspaper sparked worries over troubles in the UK financial sector arising from the credit crisis.

Investors will be looking to US housing and consumer confidence reports later in the session and analysts say weakness in these numbers could push the Federal Reserve to follow last week's half-percentage-point interest rate cut with more policy easing. That should further erode the dollar's yield advantage over other currencies, particularly the euro.

However, the dollar's recent sharp declines have provided investors with some short-term buying opportunities.

By 0802 GMT, the euro was down 0.1 percent against the dollar at $1.4064 after striking a record high of $1.4130 the previous session, according to Reuters data. Sterling fell 0.8 percent against the yen to 230.40 yen and was down 0.6 percent against the dollar at $2.0102. - Reuters