The euro fell from a one-year high on Wednesday, after the European Central Bank said markets misjudged ECB President Mario Draghi's comments a day earlier.
The hints in Draghi's speech to a major central bank conference in Portugal convinced investors that its policymakers are ready to start to withdraw the emergency stimulus for the economy that has dominated policy-making for almost a decade.
That provoked the banking world's single biggest cheerleaders for a stronger dollar, Deutsche Bank, to abandon calls for a stronger greenback and instead call the end to a dollar rally dating back to 2014.
"Our main message is that the EUR is likely to be the key vehicle via which financial conditions in the Euro-area will be tightened," Deutsche analyst George Saravelos said in a note to clients on Wednesday.
"We now see the risks as shifting towards an attempted break-out of the euro's multi-year 1.05-1.15 range to the topside."
Saravelos, who at the height of the dollar's rally called for the euro to fall to $0.85 by the end of this year, raised his end of year forecast from $1.03 to $1.16.
The euro fell 0.05 percent to 1.133 per dollar after it traded at $1.1376, a 1.4 percent gain, on Tuesday.
The latest failure of Republicans to pass healthcare legislation in the United States was also playing in to the dollar's weakness, further undermining faith in President Donald Trump's promises of other measures to support growth.
Eyes will again be fixed on the central banking conference in Sintra, Portugal, with several ECB officials speaking, along with Bank of Canada Governor Stephen Poloz and the Bank of England's Mark Carney.
The dollar's weakness pushed sterling, again under pressure from Britain's recently volatile politics, above $1.28 to its highest since Prime Minister Theresa May lost her parliamentary majority on June 8.
Conversely, it hit its weakest since November at 88.79 pence per euro.
"No matter the subtlety of any shift in guidance (by Draghi), the reaction in a yield-sensitive market is generally binary and we may well have to add currency appreciation to the risks facing ECB policy," said Bank of New York Mellon strategist Neil Mellor.
"Euro bulls may now feel that they have the perfect opportunity to challenge the post-2015 trading range whose ceiling is a couple of big figures north of spot."