The dollar retreated on Wednesday, reversing some of this week's gains in partly technical trading, after US data showed growth in the services sector slowed sharply last month.
The Institute for Supply Management's (ISM) services index fell to 53.3 in September from 65.0 in August, well short of Wall Street's median forecast for a drop to 61.0. A number above 50 indicates growth in the sector.
The dollar was already softer prior to the ISM report as investors believed the currency's recent advance may have outpaced the current outlook for US interest rate increases. But the below-consensus report added to the decline, analysts said.
"Part of the reason for the dollar's weakness today is positioning," said Nick Bennenbroek, senior currency strategist at Brown Brothers Harriman in New York.
"Over the last few sessions, markets have tried to push the euro below $1.19, but it hasn't gone below that level. So markets are squaring up," he added.
In late trading in New York, the euro stood at $1.1970, up 0.4 percent from late Tuesday and above a three-month low around $1.1900 set earlier in the week.
Against the Japanese yen, the dollar was down 0.3 percent at 113.89 yen.
If the dollar's decline continues it will be its first global session in five with losses against both the euro and the yen, according to Reuters data.
Sterling rose 0.2 percent against the dollar to $1.7625 while the dollar fell 0.6 percent against the Swiss franc to 1.2930 francs.
The services sector constitutes about 80 percent of the US economy, and includes diverse areas such as hair salons, restaurants, hotels and airlines.
The survey's jobs component fell to 54.9 from 59.6, while the prices-paid index rose to 81.4 from 67.1. New orders dropped to 56.6 from 65.8.
Bennenbroek said investors reacted more to the ISM's headline number than the prices paid component since "inflation concerns were not really new news and not prevalent in the market."
After recent hawkish comments from Fed officials, "there was really no surprise in this report and part of the (dollar's) move is technical" anyway, said Paresh Upadhyaya, portfolio manager, currency portfolio at Putnam Investments in Boston.
Kansas City Federal Reserve President Thomas Hoenig on Wednesday joined the chorus of Fed officials concerned about US inflation. Hoenig told a group of business leaders that although there doesn't seem to be much risk of a huge surge in inflation, US policy-makers must be alert to potential price pressures.
Cleveland Fed President Sandra Pianalto also gave a speech earlier on Wednesday, but did not mention the national economy.
The Fed's Anthony Santomero and Richard Fisher on Tuesday signalled the central bank's plans to tighten monetary policy further, although St. Louis Fed President William Poole left open the possibility of a surprise to the downside or upside regarding inflation.
Analysts said there was little market reaction to the Fed officials' comments, as investors have already heeded the hawkish message. Investors widely anticipate the Fed to raise its Fed funds rate to 4.0 or 4.25 percent by the end of 2005 from the current 3.75 percent, and expectations have mounted for more such tightening next year. The dollar's failure to extend recent gains prior to the ISM services number on Wednesday, after touching multi-month peaks against the yen and euro on Tuesday, also came as investors squared positions ahead of Friday's crucial US employment report.