The dollar hit a 15-month low against a currency basket on Wednesday after Federal Reserve officials said any recovery in the U.S. economy would be erratic, bolstering the view that interest rates would stay low.
Sterling fell broadly, stung after Bank of England Governor Mervyn King said weakness in the currency would help UK exporters, and aiding Britain's recovery from recession.
Despite its gains versus the pound, the dollar index hit 74.774, its lowest since August 2008, as the U.S. currency suffered against its higher-risk counterparts after strong Chinese economic data boosted shares and spurred risk appetite.
Analysts said the dollar smarted after a chorus of Fed officials said on Tuesday that high unemployment and sluggish consumer spending were risks to recovery in the U.S. economy which may keep the Fed funds rate low.
It's a continuation of the strange theme where the view for loose U.S. policy for longer is weighing on the dollar, said Paul Robson, strategist at RBS in London.
The dollar was spared further losses as European traders were hesitant to take on big positions in light of a market holiday in the United States on Wednesday.
By 1113 GMT, the dollar index .DXY traded 0.2 percent lower on the day at 74.872.
The euro EUR= rose 0.4 percent to the day's high of $1.5045.
Sterling GBP=D4 fell around a cent and a half to the day's low of $1.6635 as the BoE governor emphasised the need for the UK economy to rebalance away from imports to exports, and that a weaker pound would help achieve this.
He spoke after the central bank issued its quarterly inflation report, which said UK inflation would be below target in two years' time if interest rates rose gradually from mid-2010, as expected by the market.
RISK APPETITE RISES
European shares .FTEU3 climbed 0.7 percent on the day, taking a cue from a rise in Asian stocks on the back of strong Chinese manufacturing data which showed the export-driven economy was maintaining its recovery.
The rise in shares suggested growing appetite for risk, which helped prod the high-yielding Australian dollar to a 15-month high against the U.S. dollar, whose safe-haven appeal tends to diminish when risk demand rises.
The Australian dollar AUD=D4 rose around 0.3 percent to $0.9345, its highest since August 2008. The commodity currency was also boosted after gold prices rallied to a record high .XAU, while oil prices rose.
Currencies including the Australian dollar have been rising against the U.S. currency, which has been stung by expectations for low rates while those in Australia and elsewhere rise, increasing the returns on their assets.
The dollar was flat against the yen at 89.85 yen. The yen was little moved after China said it would refer to changes in capital flows and fluctuations in major currencies when guiding the value of the yuan CNY=CFXS, marking a departure from past language on the currency, which is pegged to the dollar.