The dollar weakened across the board on Wednesday, after U.S. housing starts dropped to their weakest level in 14 years, adding to concerns about the sector's impact on the broader economy.
A weaker housing market and a slow U.S. economy may prompt Federal Reserve policymakers to cut benchmark interest rates again from the current 4.75 percent. Fed officials next meet on Oct. 30-31.
The Commerce Department said home construction starts fell 10.2 percent last month to below Wall Street's consensus forecast.
"The dollar is weaker today because the housing data has been underwhelming, although consumer prices were fractionally more robust than people thought," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
According to another government report, U.S. consumer prices rose at the sharpest rate in four months in September. But core prices, which exclude volatile food and energy costs, rose in line with expectations.
The report however failed to have an impact on the currency market as traders focused on the U.S. housing slowdown.
"The Fed will have to ignore a rise in headline CPI above 3 percent -- global food and energy prices aren't going to respond much to a U.S. slowdown, and it makes no sense to throw the economy into recession to create offsetting declines in other prices," said CIBC World Markets in a research note.
"Growth indicators, rather than inflation readings, are likely to dominate market sentiment at this stage of the cycle," it added.
In the wake of the housing starts data, the implied prospects for a quarter percentage point cut to the target federal funds rate of 4.75 percent at the October Federal Open Market Committee meeting hit 50 percent, from 38 percent overnight, on track for the highest close since Oct. 5.
In early afternoon trading in New York, the euro was 0.2 percent higher at $1.4184.
"Markets did try to get the euro up at $1.4230. But they have not been able to sustain that. I guess there is caution because the G7 meeting is coming up," ING's McCarthy said.
The Group of Seven Finance Ministers will meet in Washington over the weekend and many analysts expect currencies to be a major topic for discussion given the recent market volatility.
The dollar index, which is a gauge of the greenback's value against a basket of six currencies, fell 0.2 percent to 78.058.
Against the yen, the U.S. currency reversed earlier gains, falling 0.4 percent to 116.47. Losses in the U.S. stock market have weighed on this particular pair.
The euro fell 0.2 percent against the yen to 165.28 yen.
The Australian and New Zealand dollars rebounded from sharp losses on Tuesday, with the Australian dollar last trading 0.1 percent higher at US$0.8887 to the dollar, and the New Zealand dollar rising 0.3 percent to US$0.7484.
Later in the session, markets awaiting the The Federal Reserve's "beige book," a snapshot of conditions in the U.S. economy, which may provide further clues on the Fed's next move on interest rates.
Meanwhile, minutes from the Bank of England's last policy meeting showed an unexpected dissenting vote calling for a rate cut. However, this had a limited impact on the pound because it was offset by stronger-than-expected labor market data.
The British pound last traded 0.2 percent higher at $2.0365.