The dollar sank to a 12-month low against the euro on Thursday, pressured by market expectations that the Federal Reserve may take a breather in its two-year campaign to raise US interest rates.
Investors increasingly expect interest rates to peak soon, after the Fed tightened rates for the 16th straight time on Wednesday, as expected, pushing the benchmark fed funds rate to 5 percent.
The Fed also said it may need to raise rates further to keep inflation down, but more tightening would increasingly depend on the economic outlook.
"It seems that the market has repudiated the Fed raising interest rates yesterday and any of the hawkish statement by the FOMC," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York, referring to the Fed's policy-setting Federal Open Market Committee.
"There is nothing in that statement that is too hawkish for this market not to sell dollars on rallies. The target of this up-move in the euro is $1.29," he added.
In late afternoon trading, the euro was up 0.4 percent against the dollar at $1.2842, after climbing as high as $1.2872 - its highest since May 2005, according to Reuters data.
Against the yen, the dollar traded at 110.54 yen, nearly flat compared with late Wednesday.
Thursday's less-than-expected rise in retail sales, added fuel to expectations the Fed will soon pause in raising interest rates. For details, see nN10392065.
Expectations of a Fed pause should continue to pressure the dollar, eroding the yield advantage of dollar-denominated assets.
"US dollar rallies will be sold until the buck forms a solid bottom. Yesterday was the beginning of a shift in the structures beneath the big US dollar sell-off that has occurred," said Andrew Busch, global foreign exchange strategist at Harris Nesbitt in Chicago.
Adding to the dollar's woes was the big rally in metals markets, analysts said.
Gold soared to another 25-year high on Thursday, silver jumped to a quarter-century peak, while copper and platinum also set records, as traders bet on sustained dollar weakness and strong global demand for metals.
The dollar had rallied earlier on relief that China had not been named a currency manipulator in a Treasury report and investors considered the dollar's recent decline as too far, too fast.
The Treasury's currency manipulation report on Wednesday was seen as dollar-positive, since naming China a manipulator would have raised fears of disruptions to global trade and foreign exchange flows. China responded on Thursday, saying it would keep improving its foreign exchange system and increasing flexibility of the yuan currency.
Meanwhile, sterling changed hands at $1.8830, up 1 percent on the day, after earlier touching a one-year high on a much stronger-than-expected UK manufacturing output data.
Investors are now looking ahead to Friday's release of the US trade deficit for March, which is expected to widen to $67 billion.