The dollar on Monday fell to its lowest against the euro in almost four weeks after a survey showed US manufacturing output grew more slowly than expected in June, reinforcing concerns about a slowdown in the sector.
But the dollar posted modest gains against the yen and sterling as thin trading conditions ahead of the US Independence Day holiday on Tuesday led to sharp swings in currency prices.
"Liquidity has really dried up. We're into the currency market's typical summer doldrums," said Michael Woolfolk, senior currency strategist at The Bank of New York.
Adding to signs that the economy was cooling, a monthly survey by the Institute for Supply Management showed that factory activity in June grew at the slowest pace in 10 months. Another report on Monday showed US construction spending in May fell 0.4 percent, undershooting the consensus forecast for a 0.2 percent increase.
The surveys reinforced the view the economy may be slowing down, a view that received added credence last week when the Federal Reserve followed up its 17th quarter-percentage-point hike in interest rates in two years by saying slower growth could help contain inflationary pressures.
That sparked speculation that the Fed could pause its campaign to raise interest rates in August. In mid afternoon New York trade, the euro was up around 0.2 percent on the day at $1.2810, after earlier climbing as high as $1.2823, its highest since June 7.
The euro was supported by data showing a June euro zone manufacturing index reaching its best reading in six years. The currency hit a new record high versus the yen of 147.05 before edging back to 146.75. The dollar fared better against the pound, with sterling down around 0.3 percent at $1.8415.
Some analysts said that recent data suggesting sluggish growth in the US manufacturing sector did not necessarily point to a more dovish Fed, especially if oil prices stay at elevated levels. On Monday, London Brent crude touched a high of $73.99 per barrel. Energy prices "are the ghost in the closet that no one wants to talk about," said Joe Francomano, director of foreign exchange at Erste Bank in New York. "But if oil keeps going higher, that's going to keep the Fed hawkish."
Against the yen, the dollar was up 0.25 percent on the day at 114.70. Earlier, an upbeat reading in the Bank of Japan's tankan business sentiment survey raised expectations that the Bank of Japan would raise interest rates for the first time in six years in July.
That helped buoy the yen to as strong as 114.10 to the dollar, but the currency quickly surrendered its gains after government officials urged the BoJ to keep its zero interest rate policy.
Against the Mexican peso, the dollar was down about 2 percent at 11.1025, on its way to its biggest one-day decline in six years despite a Mexican presidential election that officials said was too close to call.