The dollar fell to a three-month low against the euro on Wednesday after economic data added to expectations that the US Federal Reserve might not need to be aggressive in future interest rate increases.
Slower rises in US rates, which the Fed increased last week for the first time in four years, mean the differential in interest rates between the dollar and higher-yielding currencies will narrow more slowly.
The dollar sell-off was sparked by Friday's weak US payrolls data and the Fed's insistence on a "measured" pace of future monetary policy tightening, followed by a weaker than expected key survey of the US service sector on Tuesday.
"The overwhelming theme of the softness of the dollar was determined last week with a softer FOMC statement and the softer non-farm payrolls data," said Joe Francomano, vice president of foreign exchange, Erste Bank in New York.
"Prior to those two events, the markets have been very quiet and were trading in ranges and we are looking for fundamental impetus as far as determining the future direction of the dollar," he said.
By early afternoon in New York, the euro rose 0.7 percent to $1.2376 just below session highs of $1.2383, its highest level since early April.
Analysts said the euro's rise accelerated when it broke a key resistance level on technical charts around $1.2350, bringing it within six cents of a February record high of $1.2927.
Traders will now be on the lookout for any comments on the state of the US economy from Fed Vice Chairman Roger Ferguson, who is due to speak at around 1 pm EDT (1700 GMT) before the New York Association for Business Economics.
The dollar fell against the safe-haven Swiss franc to its lowest level since mid February down to 1.2256 francs before climbing slightly at 1.2269 francs.
"There is a still a lot of uncertainty in Iraq, and in terms of terrorism. All these geopolitical factors are weighing adversely on the US dollar," said Hugh Walsh, vice president of foreign exchange at Fortis Bank in New York.
The Australian dollar hit a two-month high above 72 US cents, rallying even as Australia's central bank left its key interest rate unchanged at 5.25 percent.
Sterling also rose above $1.8500 even though the Bank of England Monetary Policy Committee is widely expected to leave interest rates on hold at the end of its two-day meeting on Thursday.
The dollar shed more than 1 percent against the yen, falling briefly to 108.20 as the outlook for the US economy outweighed questions about Sunday's elections in Japan.