The U.S. dollar fell to its lowest since mid-November against a basket of major rivals on Thursday, before trying for gains, in the wake of a Federal Reserve policy statement that disappointed investors hoping for clearer signs on rate hikes, while rhetoric from U.S. President Trump unnerved traders.
Money markets had shown a 20 percent chance of a rise in U.S. rates next month but that slipped to as little as 15 percent despite the Fed sending a broadly upbeat message on the economy.
Aggressive language from Trump on Iran and a refugee deal with Australia also put the focus back on the geopolitical risks from his administration rather than the expectations of higher inflation that dominated markets' initial thinking last year.
The dollar index, which measures the greenback against a basket of six major rivals, slumped to its lowest since Nov. 14 at 99.233 in morning trade in Europe, before ticking 0.2 percent higher to 99.84. The euro hit an eight-week high against the dollar of $1.0828, before holding around $1.076, while the dollar slumped as much as 1 percent against the to 112.06 yen. The Japanese currency last traded around 112.70.
That put the dollar near Tuesday's two-month trough against the Japanese currency of 112.04 yen.
"Yesterday's FOMC statement wasn't overtly hawkish as some had speculated, no obvious signals that March is a live meeting," said Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York.
"You have the broader story around Trump's incessant combative approach to international relations, and very little news on pro-growth, pro-business stuff like taxes and infrastructure," he added. "That is hurting the dollar because it's triggering people to pare back their reflation bets on the U.S."
Trump said in a tweet on Thursday that "Iran has been put formally put on notice" for firing a ballistic missile and labelled a refugee swap deal with Australia "dumb."
The dollar index has fallen steadily since Jan. 3, although traders stressed it was not obvious it would fall much further ahead of monthly U.S. jobs numbers on Friday. Economists polled by Reuters expect U.S. employers to have added 175,000 jobs in January, up from 156,000 in December.
The rose as much as 1.5 percent against the dollar to its highest since Nov. 10 of $0.7696, driven by a recovery in exports in the fourth quarter that sent its current account surplus soaring to a record high and headed off any thoughts of a dip into recession.