The Commerce Department said on Thursday that retail sales fell 1.2 percent, the largest decline since September 2009 when the economy was emerging from recession. Data for November was revised slightly down to show retail sales edging up 0.1 percent versus 0.2 percent as previously reported.
The sharp drop suggested a moderation in the pace of consumer spending, which accounts for more than two-thirds of the US economy, in the fourth quarter.
"The dollar had been looking good until retail sales came in much weaker than expected. The data suggests there is less in the economy than people had thought, and has pushed the dollar lower," said Daniel Katzive, head of foreign exchange strategy North America at BNP Paribas.
The dollar index, which measures the currency against a basket of six rivals, was down 0.1 percent, last at 97.035 .
Thursday's data is supportive of the Federal Reserve's current inclination towards patience in its rate-hiking cycle. After four increases in 2018, market participants are anticipating the central bank will hold off on raises for the next one or two quarters.
"The Fed is on hold for Q1 and by the time it needs to make a decision on policy again, we'll have a lot more data and we'll have a better sense if this is softness associated with equity market concerns, or whether there was something more profound going on," said Katzive.
The euro rose on the back of the dollar's move, up 0.29 percent, last at $1.130.
Earlier on Thursday, the single currency hit a three-month low after economic data showed Germany's economy stalled in the fourth quarter of 2018. Broadly, the euro zone economy slowed as expected year-on-year in the last three months of 2018. The fall was cushioned, however, by hopes of progress in China-US trade talks, which supported the currency.
Market analysts fear that US President Donald Trump could turn his attention to European imports after China, and potentially impose tariffs on European automakers in the coming days.
The United States is the main export destination of European Union cars, well ahead of China, and the impact is significant especially for Germany, which has the biggest value-added in exports of cars to the United States.