The dollar weakened on Monday, pressured by growing expectations the U.S. Federal Reserve will either pause or halt its interest rate hike cycle, with the euro and Swiss franc leading gains among its rivals.
Even after last week's strong U.S. jobs data for December, market watchers believe the world's biggest economy is losing momentum.
Recent comments by Fed Chairman Jerome Powell have added to expectations the central bank may adopt a more cautious outlook.
On Friday, Powell told the American Economic Association that the Fed is not on a preset path of rate hikes and that it will be sensitive to the downside risks markets are pricing in.
"Fed Chair Powell's comments Friday that policymakers were flexible and 'listening carefully' to financial markets helped support the impression that the Fed tightening cycle may slow or pause in the coming months," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
He added that Fed funds futures continue to price in the small risk of a rate cut over the coming year, with roughly eight basis points of easing implied in the January 2019-January 2020 spread early on Monday.
In mid-morning trading, the dollar index was down 0.54 percent at 95.66, not far from a 2-1/2-month low of 95.68 hit last week.
Money markets have priced out a U.S. rate hike this year and are even pricing in a small probability of a rate cut in 2020.
The Fed raised rates four times in 2018. Waning expectations of a U.S. rate hike boosted the euro , which rose 0.76 percent to $1.1478. The Swiss franc also gained sharply versus the dollar, which fell 0.72 percent to 0.9791 franc.
The dollar outperformed other currencies in 2018 on the back of a Fed being the only major central bank hiking rates. If it stays on hold in 2019, other currencies such as the euro might benefit.
The FX options markets is showing euro risk reversals - a gauge of calls to puts and a market sentiment gauge on the currency - have steadily climbed to their highest levels in more than six months as investors bet on more upside for the single currency.
News over the weekend of a Chinese policy stimulus, meanwhile, helped lift sentiment and boost commodity-focused currencies such as the Australian dollar, gaining 0.27 percent to $0.7131.
Financial markets are also optimistic about a meeting of U.S. officials and their counterparts in Beijing this week, the first face-to-face talks since U.S. President Donald Trump and Chinese President Xi Jinping agreed on Dec. 1 to a 90-day truce in their trade war.