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Up until a few weeks ago a firm dollar was a gift to central bankers outside the U.S., with weaker domestic currencies providing a powerful economic boost and aiding monetary policy easing.
But with the dollar now in reverse amid mixed U.S. economic data, analysts say central banks in Europe and Japan may have to maintain monetary stimulus for longer than anticipated.
The dollar fell to a two–week low of about 118.90 yen on Thursday, while the euro hit a three-month peak around $1.1445 – taking its gains in the last month to just about 8 percent.
It recovered partly later in the session, but remained near recent lows.
Disappointing economic news has knocked the wind out of the sails of the resilient greenback. Take Wednesday's data, for instance, that showed retail sales were unchanged in April against analyst expectations for a 0.2 percent rise, fuelling talk that the Federal Reserve would raise interest rates later than previously expected.
"As the prospect of Fed rate hikes pushes further out, the likelihood that other central banks will be forced to maintain easy monetary policy settings for longer also increases," Jane Foley, a senior currency strategist at Rabobank, said in a note on Thursday.
"Between July 2014 and early March 2015, the value of the dollar index soared by 25 percent. The stronger tone of the greenback facilitated an easing of monetary conditions via the exchange rate for a range of other central banks. For central banks such as the Bank of Japan (BOJ) and the European Central Bank (ECB), the stronger tone of the dollar enhanced the impact of their policy moves during this period," she added.
Indeed, data on Wednesday showed the mix of a weak euro, lower oil prices and monetary stimulus was working its magic on some of the euro zone's big economies.
France, long a laggard of the major European countries, grew 0.6 percent in the first quarter from the previous one – its fastest rate in two years. Even Italy's economy grew 0.3 percent in first three months of year, following no growth in the last quarter of 2014.
"One of the great ironies in the market is that since the ECB started its bond-buying program, yields have actually risen and euro/dollar has strengthened," Boris Schlossberg, managing director of FX strategy at BK Asset Management, said in note.
"It will be interesting to see if (ECB President Mario) Draghi expresses his concerns about that, which may take some of the momentum out of the euro move," he said.
The ECB launched a 1-trillion euro ($1.1 trillion) asset-purchase program earlier this year to help stimulate inflation and growth in the single currency zone. This helped accelerate a fall in the euro, which hit a low around $1.05 in March.
A sharp rise in government bond yields, meanwhile, is also putting upward pressure on the single currency. Benchmark 10-year German Bund yields were trading at about 0.76 percent on Thursday, hovering near their 2015 high of 0.799 percent set last week.
Analysts see the dollar's retracement as a correction – a temporary pullback that is likely to reverse alongside the stronger U.S. economic data that is expected in the second half of 2015.
"The fact that the dollar has weakened and domestic currencies have strengthened does have implications for policy outside the U.S., but at this stage it is still likely to be seen s as a temporary correction," Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi, told CNBC.
"The risk is that it is proving deeper than anticipated, data is disappointing and the U.S. economy has hit a soft patch," he said. "The more we correct lower, the more likely we are to see a sharper rebound in the dollar in the second half of the year."