The dollar slipped against the euro on Wednesday after US retail sales data showed consumer spending slowing, which analysts said would keep the Federal Reserve on a path of gradual interest rate hikes.
More moderate US interest rate increases would likely diminish the allure of dollar-denominated assets to foreign investors
Traders are further bracing for US inflation data due later in the week and analysts expect some tepid numbers that would keep the dollar on the defensive.
The US producer price report is due on Thursday, with markets forecasting a rise of 0.2 percent. Consumer price data is due on Friday and the median forecast is for a 0.2 percent increase.
"What we're probably going to see is some moderation in PPI and CPI numbers and that may filter into the current wisdom in the market that the Fed will be on hold until August," said Mike Malpede, senior foreign exchange analyst at Refco Group Ltd in Chicago.
"On balance, that might be dollar-negative, but that may also be discounted by traders," he added.
US retail sales slid 1.1 percent in June, far beyond economists' forecasts of a 0.6 percent fall. Excluding a large decline in auto sales, retail purchases fell 0.2 percent.
The euro climbed to session highs around $1.2421, according to Reuters data, before trading back down to $1.2383, up 0.4 percent.
The dollar was up about 0.5 percent against the Japanese currency at 109.16 yen. The yen also fell sharply against the euro, trading at 135.17 yen.
Against the Swiss franc, the dollar was at 1.2290 francs, down 0.5 percent. Sterling traded virtually flat at $1.8564.
Some economists remain upbeat about consumer spending, which accounts for about two-thirds of US economic activity.
"It is highly unlikely (it) will falter given robust employment growth and extraordinarily expansive fiscal and monetary policy. We do see real consumer spending growth the next several quarters around the 3 percent annual pace," said Wes Beal, chief US economist at IDEAglobal in New York.
A separate report showed US June import prices unexpectedly fell 0.2 percent, the first fall in nine months.
"With two major US economic reports (the other being the US trade deficit data on Tuesday) now behind us for the week, it certainly appears that softness in the economic data is going to be with us for a while," said Michael Woolfolk, senior currency strategist at Bank of New York.
"Unless inflation or manufacturing data surprise to the upside later this week, the dollar looks particularly vulnerable to renewed selling," he added.
Earlier, the yen struggled, plumbing a five-week low against the euro as worries over the outlook for the technology sector weighed on Japan's stock market and its currency.
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