The dollar weakened on Wednesday after data showed that surprisingly weak capital inflows into the US in April failed to cover the trade deficit for that month. This was the second consecutive month that net Treasury International Capital (TIC) inflows failed to cover the US trade gap, underscoring analysts' concerns that despite its 2005 rally, the dollar's structural frailties have not disappeared.
The dollar index, a broad measure of the dollar's value against a basket of major currencies, posted its biggest one-day decline in three months on Wednesday. Across the board, the dollar retreated from multi-month highs touched earlier in the global session.
"All in all, though April data is generally lost in the fog of the rear-view mirror, the numbers do not provide confidence that the dollar upswing will continue once the main longer-term short dollar exposure is unwound," wrote Alan Ruskin, director at research firm 4Cast, in a research note on Wednesday.
Soft US consumer price inflation data for May and a Federal Reserve report that inflation pressures remain "modest" also helped cool expectations surrounding further Fed interest rate hikes and keep the dollar offered.
Late Wednesday, the euro was up at $1.2110, bouncing back sharply from another new nine-month low around $1.2015.
The dollar index was off 0.7 percent at 88.68.
Against the Swiss franc, the dollar fell 0.5 percent to 1.2707 francs and was down 0.2 percent against the Japanese yen at 109.21 yen.
Sterling rose to $1.8217, up 0.8 percent from late Tuesday.
US net capital inflows totalled $47.4 billion in April, compared with a revised $40.6 billion in March. The country's trade deficits in April and March totaled $57 billion and $53.6 billion, respectively.
Wall Street economists had forecast net inflows of $60.0 billion in April, according to a Reuters poll.
The currency market monitors the capital flows report closely because of the huge US current account deficit, of which trade is by far the largest major component.
The dollar was also kept under selling pressure by the 0.1 percent fall in US consumer price index (CPI) in May, the first fall in 10 months, primarily due to a 2 percent plunge in energy costs. Markets had expected CPI to be flat after the previous month's 0.5 percent increase.
Excluding volatile food and energy costs, the core consumer price index rose by a smaller-than-expected 0.1 percent last month. Analysts had expected core CPI to rise 0.2 percent.
Lower inflation suggests the Federal Reserve could slow the pace of dollar-supportive interest rate increases.
The Fed's latest "Beige Book" snapshot of the US economy showed that business activity continues to expand and that inflation remains contained.
Data released earlier Wednesday showed a rebound in the New York Fed's June manufacturing index to 11.65 from a revised minus 11.06 in May.
And US industrial production rose 0.4 percent in May, rebounding from the 0.3 percent fall in April, the Fed said.
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