The dollar weakened across the board on Thursday after rising for four straight sessions, as investors cashed in recent gains driven by widespread expectations of a U.S. Federal Reserve interest rate increase next month.
The minutes of the latest Federal Reserve meeting released on Wednesday reinforced the rate hike view, providing broad, long-term support for the dollar.
However, some analysts opined that the minutes also showed a debate among the Fed members of the monetary policy committee about the U.S. economic outlook, which may have affected sentiment about an impending rate hike in December. That could partly explain why the dollar weakened despite a generally upbeat view on the U.S. economy, analysts said.
Still, futures traders have placed a 72 percent chance of the Fed raising rates next month on Thursday, up from 68 percent following the release of the Fed minutes on Wednesday afternoon, according to the CME Group's FedWatch.
"What we're seeing is probably a squeeze in dollar longs," said Vassili Serebriakov, currency strategist, at BNP Paribas in New York.
Last week's U.S. dollar net long positions of $33.68 billion were the largest since mid-August.
"The Fed minutes were not dovish, so this pullback in the dollar could just be position-adjustment. The outlook on the dollar has not really changed," Serebriakov said.
In afternoon trading, the dollar fell 0.52 percent against the to 122.85. The yen strengthened after the Bank of Japan kept policy steady.
The dollar index was down 0.69 percent at 98.97. On Wednesday, the index hit a seven-month peak.
Losses in the dollar index could be mainly attributed to the greenback's fall against the euro. The euro on Thursday rose 0.54 percent to $1.0736.
Meanwhile, the New Zealand and dollars were the biggest gainers against the U.S. currency, both rising about 1 percent.
Still, there are plenty of dollar bulls out there.
"We think only about 60 percent of the Fed hike is priced in, so there is clearly scope for the dollar to go higher if that pricing moves to 80-90 percent," said Barclays strategist Nick Sgouropoulos. "You could see this morning that people are selling the rally in euro-dollar."
The fed funds futures curve is pricing in two rate hikes with a minimal chance of a third throughout 2016.
Data showing a fall in U.S. initial jobless claims last week and a slight pick-up in factory activity also supported a rate hike in December.