The dollar weakened on Tuesday as softer-than-expected US economic data and the minutes of last month's Federal Reserve policy-makers' meeting signalled that US monetary tightening is nearing its end.
"Most members thought the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy," said the minutes from the March 27-28 policy-setting meeting, the first under new Chairman Ben Bernanke.
The Fed raised US interest rates by a quarter-percentage point in that meeting, its 15th rate increase since June 2004.
"There are undeniable dovish undertones, and the market only wants to focus on reasons to the sell the dollar at present. These minutes provide just that," said David Mozina, head of North American strategy at Lehman Brothers in New York.
Soft data on US core producer prices and housing starts released earlier also added to market expectations that the US economy is now in the late stages of the Fed's dollar-supportive rate-hiking cycle.
The euro rose to near two-week highs against the dollar around $1.2328 just after the release of the Fed minutes, up 0.6 percent from late on Monday.
"The figures today and the minutes all suggest more than any other time recently that the Fed is going to pause. That's put some pressure on the dollar. It's never a straight line, though," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
"We have clearly moved the trading range up in the euro to $1.1850, and then $1.2150, and now we could extend to $1.2450."
Against the yen, the dollar fell to near two-week lows at 117.26, down 0.4 percent on the day.
The dollar slid 0.6 percent against the Swiss franc to 1.2716 francs. It earlier hit a roughly three-month low around 1.2710 francs.
Sterling rose 0.6 percent to $1.7805.
Matt Kassel, head of FX strategy at IDEAglobal in New York, said dovish remarks from the Fed meeting have signalled the "beginning of a very large dollar decline that will continue for the remainder of 2006."
In the wake of Tuesday's minutes and US data, the chances that the Fed will increase rates again in June dropped to about 34 percent from 54 percent on Monday. However, the futures market has fully priced in a quarter-percentage point rate hike at the Fed's May meeting.
"So in essence there's already been a drop short-term rates have already come off a bit in the last couple of days and the minutes have reinforced that and extended the move lower in rates, and that is working against the dollar," said Bob Lynch, head of G10 FX strategy at HSBC Bank USA in New York.
San Francisco Fed President Janet Yellen was also equally cautious about the pace of US interest rates, saying on Tuesday that Fed is "highly alert" to the possibility of too much monetary tightening.
Analysts also said dollar sentiment would likely remain negative as tensions over oil producer Iran's nuclear program sent oil prices to record highs and gold to a fresh 25-year peak.