The dollar was on track for its worst daily loss in nearly a month on Thursday as U.S. manufacturing data and comments by Federal Reserve officials reinforced expectations the Federal Reserve will likely skip an interest rate hike at its upcoming meeting.
The euro recovered from a two-month low on Thursday after European Central Bank (ECB) President Christine Lagarde said further policy tightening was necessary.
The dollar index , which measures the currency against a basket of six peers, fell 0.547% at 103.580, off a two-month high of 104.7 touched on Wednesday as investors trimmed bets the Fed will raise interest rates this month.
Fed officials pointed toward a rate hike "skip" at its June 13-14 meeting, giving time for the central bank to assess the impact of its tightening cycle thus far against still-strong inflation data.
Markets are pricing in a roughly 32% chance that the Fed will raise rates by 25 basis points at its June meeting, compared with a near 67% chance a day ago, according to the CME FedWatch tool.
"I think the market is anticipating that the dollar is still going to be in a position where against higher-yielding currencies it will struggle," said Edward Moya, senior market analyst at OANDA.
U.S. central bankers should not raise interest rates at their next meeting, Philadelphia Federal Reserve President Patrick Harker said on Thursday, even though high inflation is coming down at a "disappointingly slow" pace.
A Thursday readout of U.S. private payrolls data showed jobs increased more than expected, which could result in the Fed keeping rates elevated for some time. Private payrolls increased by 278,000 jobs last month, according to ADP.
U.S. manufacturing contracted for a seventh straight month in May as new orders continued to plummet amid higher interest rates, but factories boosted employment to a nine-month high.
The Institute for Supply Management (ISM) said on Thursday that its manufacturing PMI fell to 46.9 last month from 47.1 in April.
The euro was last up 0.64% to $1.0757, coming off a two-month low of $1.0635 on Wednesday, after some European countries released national inflation data showing signs that price pressures have eased.
While data on Thursday showed that inflation in the 20 nations sharing the euro eased to 6.1% in May from 7.0% in April, below expectations for 6.3% in a Reuters poll of economists, the current level is more than three times the ECB's 2% inflation target.
"We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels," Lagarde said in a speech.
Money markets are pricing in an 85% chance of a 25 basis point hike when the ECB meets on June 15. Another 25 basis point hike is expected in July, according to Refinitiv.
"The euro is taking a bit of a ride higher," said John Velis, FX and macro strategist at BNY Mellon. "There's a sort of narrowing interest rate differential ... when the ECB is expected to hike one or two more times and the Fed is more questionable about that."
Elsewhere, sterling was last trading at $1.2524, up 0.67% on the day, while the Australian dollar rose 0.98% versus the greenback at $0.657.