Gloomy figures on regional manufacturing from the New York and Philadelphia Feds also kept a lid on the dollar's rise.
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The surprise 0.2 percent rise in U.S. consumer prices excluding food and energy last month boosted the year-over-year gain to 1.9 percent, edging closer to the Fed's 2 percent target.
"It's closer to the Fed's goal. Given the recent wave of poor data, this is a bit of a relief rally for the dollar," said Ian Gordon, G10 FX strategist at Bank of America Merrill Lynch in New York.
The dollar index was last up 0.5 percent at 94.376, recovering from a seven-week low at 93.806. It receded from session highs on Dudley's remarks late morning.
"Incrementally, he sees less chance of a hike this year," Gordon said.
Earlier, the latest U.S. consumer price data compounded euro weakness spurred by comments from European Central Bank policymaker Ewald Nowotny, who said it was "obvious" the bank must search for more ways to stimulate the euro zone economy.
Nowotny's comments raised expectations of the ECB providing more stimulus in coming months.
While the dollar was up against a basket of currencies on Thursday, there was a growing sentiment the strong dollar environment that has dominated the past 18 months is fading.
"Generally the theme is still dollar weakness across the board, because the market is pricing out a rate hike this year," said Thu Lan Nguyen, currency analyst with Commerzbank in Frankfurt.
U.S. interest rates futures implied traders see about a 1-in-4 chance the Fed will raise interest rates by year-end, according to CME Group's FedWatch program.
The euro was down 0.8 percent at $1.1384, retreating from an earlier peak of $1.1495, its strongest since Aug. 26.
The greenback weakened further against the yen on bets the Fed would not raise rates in 2015 due to the weakening global outlook. It hit an eight-month low earlier at 118.07 yen before retracing to 118.69 yen, down 0.1 percent from Wednesday.