Low readings for German inflation drove the euro back to nine-day lows against the dollar on Thursday. Dollar bulls are still recovering from the collapse in faith in the "Trumpflation" trade caused by last week's defeat for the White House on healthcare and the greenback was again struggling to make progress past 111 yen.
But against the euro it gained a quarter of a cent, trading as strong $1.0731 after several German states reported a slump in annual inflation to well below the ECB's 2 percent target.
That later delivered an overall national number of 1.5 percent and added to signals from sources close to the bank on Wednesday that ECB officials were unhappy at a shift in market expectations towards tighter monetary policy and higher euro zone interest rates.
"That sort of off the record briefing that came through yesterday and German inflation this morning do seem to have pulled the rug from under the euro," said Nick Parsons, a strategist with National Australia Bank in London.
"More generally it has been pretty quiet this morning. We are in one of those awful periods where we cannot decide which currency we dislike the least. And that tends to lead to lower volatility."
The fall for the euro, down from a 4-1/2-month high of $1.0906 scaled on Monday, helped the broader dollar index into positive territory, up 0.1 percent at 100.15.
Sterling, knocked back by the dollar's recovery as Prime Minister Theresa May lodged Britain's formal request to leave the European Union on Wednesday, was also down 0.1 percent at $1.2414.
Several ECB policymakers said on Thursday the bank should stick to its already laid out policy path.
Reuters on Wednesday reported ECB sources as saying that policymakers had been taken aback by moves to price in an interest rate hike early next year and would be keen at their April meeting to reassure investors that their easy-money policy was far from ending.
"It's a bit soon to draw conclusions but yesterday's ECB sources piece put a dampener on front end rates and that has weakened sentiment towards the euro somewhat," said Citi G10 currencies strategist Josh O'Byrne.
"The mood around the dollar has softened a lot. On balance I think most people still buy into this stronger global demand story but it may be a bit late in the day to be chasing this theme."
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