Government data showed U.S. consumer prices rose at twice the rate expected in July. Analysts said higher prices in the short term may help boost the case for interest rate hikes by the Federal Reserve, although they warned that over time, inflation would hurt the economy.
"What you have is a clear change in scenario, and a very rapid one,'' said Joseph Trevisani, market analyst at FX Solutions in Saddle River, New Jersey, adding:
"One leads to perhaps a higher chance of a rate cut [in the euro zone], and the other leads to perhaps a higher chance of an American rate hike at some point,'' he added. "The scenario is just starting to diverge both sides to the benefit of the dollar.''
In late afternoon trading in New York, the euro was 0.8 percent lower at $1.4807, after falling as low as $1.4779, the lowest since late February, according to Reuters data. The European currency is now more than 10 cents below a record high of $1.6038 struck in July.
The dollar index, which measures the value of the greenback against a basket of six currencies, rose for a 10th consecutive session to hit a six-month high of 76.823. It was last 0.5 percent higher at 76.652.
The dollar was 0.1 percent higher at 109.61 yen.
The euro also declined against sterling . It traded 0.7 percent lower at 79.29 pence.
Renewed weakness in oil prices and a break of $1.4850 also helped the greenback extend its gains versus the euro, some analysts said.
"We have tested the level $1.4850 a number of times and only once on Tuesday did we break that very briefly,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto. "Today when it broke that level it gained momentum.''
Oil prices are down more than $30 from a record high hit in July. Crude oil settled 0.9 percent lower on Thursday at $115.01 a barrel.
USD Has Bottomed: Goldman
Stabilizing U.S. economic growth, falling oil prices and a deteriorating outlook outside the United States have led Goldman Sachs to abandon its 10-year bearish stance on the dollar.
"It is time to say goodbye to our long-held dollar bearish stance,'' the largest U.S. investment bank wrote in a research note. "The valuation and growth-driven improvements that we have been observing for a while have reached the point where they notably improve the medium- to long-term outlook for the dollar.''
Goldman now sees the euro falling to $1.45 in three months, compared with previous estimates of $1.56.
The dollar has rallied more than 5 percent against the euro this month with help from a sell-off in oil prices and weak data in Europe and Asia.
German and French gross domestic product shrank in the second quarter, culminating in a 0.2 percent contraction in overall euro area growth that raised the possibility of recession in Europe.
The dismal readings came a day after the Bank of England issued a bleak outlook for the UK economy, while official figures showed Japan's economy shrank in the second quarter and Australia's central bank said it would not wait for inflation to fall before cutting interest rates.
Earlier, the U.S. Labor Department said the Consumer Price Index rose 0.8 percent in July, far above the 0.4 percent gain forecast by economists polled by Reuters. A separate report showed initial jobless claims fell by 10,000 last week but were well above the level economists expected.