The dollar hit a seven-week low against the on Wednesday and its lowest this year versus a basket of currencies, weighed down by soft U.S. housing number ahead of the release of minutes from the Federal Reserve's latest policy meeting.
The euro rose nearly as high as $1.38, its strongest level since January 2. The dollar later gained some ground, leaving the euro last trading flat on the day just above $1.37, with equity markets offering investors little direction.
Tuesday's New York manufacturing and U.S. housing data were the latest numbers out of the United States to disappoint investors, increasing pressure on the dollar.
On Wednesday, Commerce Department data showed U.S. housing starts recorded their biggest drop in almost three years in January.
The numbers bolstered the case for the Fed to be patient in reducing its huge bond-buying program, ahead of the minutes from the January policy meeting when the Fed opted to trim asset buying by another $10 billion per month.
Against a basket of major currencies, the dollar index fell as low as 79.92, its lowest this year. It was last around 80.04, little changed from late on Tuesday.
Nevertheless, most strategists still expect the Fed to keep tapering, barring a major economic shock, although some think quantitative easing could continue into next year, driven by the need to keep economic growth going.
The dollar also hit a session low against the yen of 101.83 before paring losses and is currently down 0.1 percent at 102.24 yen.
Yields on benchmark 10-year notes slipped to just below 2.7 percent from just above it percent the previous session.
The low yields are pressuring the dollar and keeping the currency from gaining against the yen, said BK's Schlossberg.
Equity Flow Gap
Meanwhile, Treasury figures showed overseas investors had sold almost $120 billion of U.S. assets in December.
Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, noted that the net outflow from U.S. equities over 2013 has amounted to a huge $214 billion.
In contrast, the euro zone attracted inflows into stocks of 111 billion euros. At the same time, the euro zone enjoyed a record current account surplus of 216 billion euros while the United States ran up a deficit of almost $400 billion.
The yen, meanwhile, rebounded from Tuesday's falls, which were prompted by the Bank of Japan's decision to extend and expand a scheme to promote bank lending.
Betting on dollar-yen was one of the biggest hedge fund trades for the start of 2014, and with the dollar having finished last year at 105.275 yen the trade is now showing sizeable losses.
The euro was also down 0.1 percent at 140.72 yen.
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