The dollar gave back some of the previous two week's gains on Tuesday after mixed economic data did little to clarify the direction of US interest rates.
The combination of mixed inflation data, strong fund flows into the United States and weak industrial production data left the dollar broadly lower in the US session as dealers lightened long dollar positions ahead of more key inflation data on Wednesday.
"What we're seeing is a market that had bought the dollar over the last week and a half or so and is now running out of steam," said Meg Browne, senior strategist at Brown Brothers Harriman. "You can see that because the dollar is failing to benefit from strong data."
Waning expectations of an interest rate cut had helped the dollar gain ground against major currencies in recent weeks. Lower rates would reduce the dollar's competitive edge among overseas investors against higher-yielding currencies.
"Most of the data (on Tuesday) wasn't sufficiently out of expectations to actually push the dollar higher," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York.
Likewise, a widely awaited consumer price index release on Wednesday will have to come in "quite a bit above expectations to see the dollar benefit tremendously from it," he said.
The euro gained nearly 0.1 percent against the dollar to trade at $1.2541. McCarthy said some of the dollar selling was because the euro has not been able to get below the key level of $1.2480, which could trigger more dollar gains.
The dollar fell nearly 0.3 percent against the yen, trading at 118.71 yen. Sterling rose 0.5 percent to $1.8704, while the dollar fell 0.3 percent against the Swiss franc to 1.2668 francs. Helping push the dollar lower, a report on US industrial production showed a 0.6 percent decline in manufacturing in September compared with the median forecast for no change.
"It would seem the market was simply waiting for a dollar negative number to continue selling it, and since PPI and TICS were both dollar positive, it took a weaker-than-expected industrial production number to do the trick," said Brian Dolan, FX research director at Forex.com in Bedminster, New Jersey.
Earlier, the dollar had received a boost after the Treasury Department reported August net capital inflows of $116.8 billion, sharply up from $32.9 billion in July, and more than twice the $50 billion Wall Street economists had forecast.
"I think it's a vote of confidence for dollar bulls as it shows we are adequately financing our deficit for now," said Michael Woolfolk, senior strategist at Bank of New York.
The flows data helped offset any impact of a Labour Department report that the US producer price index for September fell by 1.3 percent, well above an expected 0.6 percent decline. The dollar rose against the Canadian dollar after the Bank of Canada kept interest rates steady on Tuesday, as expected, but revised down its economic growth forecasts and it forecast a decline in inflation. The US dollar last traded up 0.1 percent at C$1.1384.
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