The dollar fell broadly on Monday after dovish comments from a U.S. Federal Reserve official added weight to expectations that U.S. monetary policy would stay ultra-loose for a prolonged period.
The dollar fell to a six-week low against the yen and the euro gained more than three quarters of a percent against the greenback. Moves were exacerbated by thin liquidity with Tokyo markets shut and ahead of Thursday's U.S. Thanksgiving holiday.
St. Louis Federal Reserve President James Bullard said on Sunday that the central bank should keep alive its mortgage-related asset purchase programme beyond a planned end date to help stimulate the economy.
Traders were also encouraged to sell dollars in favour of higher-yielding and perceived riskier currencies as gold prices XAU= jumped to record highs, European shares .FTEU3 rose 1.4 percent and oil prices CLc1 gained more than 1 percent.
New highs in gold were a major catalyst in invigorating confidence and pushing the dollar lower, Nomura currency strategist Ned Rumpeltin said.
Combined with the Bullard comments and some short covering after last week's moves, the dollar is likely to remain under pressure today, he said, adding the holiday in Japan had thinned volumes and may have exaggerated the dollar's decline.
Expectations of prolonged low U.S. interest rates and signs of global economic recovery have kept the dollar in a steady decline since March.
Analysts said there was a divergence in tone between the Federal Reserve and the European Central Bank, with Bullard's remarks coming after ECB President Jean-Claude Trichet said on Friday that banks risked becoming addicted to easy money.
ECB Executive Board member Jose Manuel Gonzalez-Paramo was also quoted in a newspaper interview published on Sunday saying the central bank believed interest rates are now appropriate.
As we look ahead divergence in central bank policy will be a key driver in FX markets - there are a lot of liquidity issues here. It's not just about interest rates, Rumpeltin said.
At 1100 GMT, the euro EUR= was up 0.8 percent at $1.4977 EUR=. Against a basket of currencies, the dollar .DXY dropped 0.8 percent to 75.051, off a Friday high of 75.879.
Against the yen, the dollar fell 0.1 percent to 88.83 yen JPY=, having earlier hit a six-week low of 88.58 yen, according to Reuters data. The euro EURJPY=R also rose 0.7 percent to 133.10 yen.
Lending further support to the euro, a key survey showed the euro zone's service sector grew at its fastest pace in two years in November, suggesting an economic recovery will continue in the fourth quarter, albeit at a slower rate.
Markets were awaiting a speech by Trichet in Madrid at 1245 GMT, while further clues to Fed policy may be gleaned with Tuesday's release of minutes of the last Fed meeting. [MI/DIARY]
Everyone is looking to the major central banks to begin their exit strategies, so the market is very sensitive to any comments on liquidity, said Niels Christensen, currency strategist at Nordea in Copenhagen.
The jump in gold and oil prices bolstered the riskier commodity-linked currencies, with the Australian dollar up 1 percent against the dollar at $0.9243 AUD=D4 and the New Zealand dollar up 1.3 percent at $0.7333NZD=D4.
The U.S. dollar also fell 1.1 percent against the Canadian dollar to C$1.0581 CAD=D4