The Fed has made it clear that monetary policy will remain accommodative until it sees broad and sustained growth in jobs, but the dollar did recover against the yen and pare losses against the euro.
Other data showed a sharp drop in gasoline costs led U.S. consumer prices to tumble in April by the most in more than four years. Meanwhile, groundbreaking for new U.S. homes—known as housing starts—fell more than expected in April from an almost five-year high.
"The dollar was on an uptrend headed into today's number, mostly due to an optimistic view of the U.S. economy," said Vassili Serebriakov, FX strategist at BNP Paribas in New York.
"The Fed has fallen short of its mandate on jobs and inflation, so the data highlights the need for further accommodation," he said. "The data also warrants a reconsideration of the bullish dollar view."
(Read More: Markets Not Spooked by Fed 'Taper' Talk, Yet)
Dollar losses accelerated in mid-morning in North American trade after a survey showed factory activity in the U.S. mid-Atlantic region contracted in May as new orders fell to their lowest level in almost a year.
Dallas Federal Reserve Bank President Richard Fisher said a slowdown in U.S. inflation was benign and could "unleash" consumer spending, Fisher said, adding that he was not worried about the risk of deflation.
"The data today was broadly weak, and overall, it drives home the fact that the economic backdrop remains uneven, and that will keep the Fed's foot on the accelerator by continuing to engage in accommodative policy," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"Talk about the Fed scaling back its asset purchases is premature, but we do expect it to happen sometime at the turn of the year," he said.
Meanwhile, falling prices in Germany and France highlighted the risk of deflation in the euro zone, which slipped into its longest-ever recession at the start of this year, increasing the risk of more European Central Bank interest-rate cuts.
(Read More: Much More Needed to Take Shine Off the Euro)
Traders said investors were eager to buy dips in the dollar, which was expected to gain further, while the yen continued to weaken following April's aggressive Japanese monetary easing.