The dollar plunged against a broad swath of currencies on Monday as weak U.S. manufacturing data curbed expectations that the Federal Reserve will rein in its bond purchases anytime soon.
Investors pared lofty positions in the greenback after data showed output at U.S. factories declined in May for the first time in six months.
Manufacturers in China and Europe also struggled last month as demand fell, suggesting the global economy still requires support from global central banks.
"Over the last few weeks the dollar has been trading more like a growth currency than a safe haven, so today's data had people rethinking whether the Fed will taper its monthly bond purchases," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Having said that, the dollar was long overdue for a pullback, especially with long positioning in dollar/yen so high," he said.
(Read More: US Manufacturing Shrinks; Construction Spending Up)
Positioning data on Friday showed currency speculators had continued to add bets on further dollar strength, with contracts at their highest since at least June 2008.
The dollar in recent weeks has been buoyed by expectations the Federal Reserve could reduce its $85-billion-per-month stimulus program.
The Fed's bond buying program, tantamount to printing money, has pressured the U.S. currency since it was launched in the midst of the global financial crisis.
In early afternoon New York trading, the dollar fell below 100 yen, hitting 98.86 yen, its lowest since May 9. It last traded at 99.51 yen, down 0.8 percent on the day.
The dollar index, which tracks the greenback against a basket of currencies, was down 0.8 percent at 82.68.
"While the (ISM) data for now constrains the thoughts of QE (quantitative easing) tapering, this data is weak enough that it will also raise broader questions on global growth," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
However, Ruskin pointed out that although the ISM report confirms that the manufacturing sector is soft, "it says little about the wider economy that has looked stronger than the manufacturing numbers."
Strong Dollar Showing in May
Investors also took profits on the dollar after a good run in May, when the greenback gained nearly 2 percent against a basket of currencies. That was the dollar's second-best monthly performance so far this year.
The dollar also posted monthly gains of more than 3 percent versus the yen.
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"There was a lot of dollar buying in May, partly due to some upbeat U.S. data, and now market participants are stepping back a little bit to capitalize on these gains," said Brian Kim, currency strategist at RBS Securities in Stamford, Conn.
Dollar weakness was further exacerbated by a firmer euro as the euro zone's manufacturing sector showed signs of stabilizing. The Purchasing Managers' Index indicated that the decline in the region's manufacturing eased significantly in May.
The euro was last up 0.6 percent against the dollar at $1.3068, having reached a session high of $1.3107.
The next focus is Thursday's European Central Bank rate decision.
Market participants are weighing the possibility of another interest rate cut, either in the benchmark refinancing rate or a move to take the deposit rate negative. Both moves could drag the euro lower.
Investors will also keep their eye on the U.S. May employment report due on Friday, with Wall Street analysts expecting job gains of 170,000 and an unemployment rate of 7.5 percent. Deutsche Bank's Ruskin said if the U.S. non-farm payrolls report is strong, the poor ISM data would be easily forgotten and the dollar would rally again.
"Higher yielding currencies, such as the Aussie and Kiwi, are benefiting from expectations that global central banks will remain supportive, allowing these currencies to maintain their yield advantage," Commonwealth's Esiner said.