The dollar lost near the bottom of its recent range against major peers on Tuesday, knocked back by weak US factory data overnight and on markets wagers of faster normalization of monetary policy in other countries.
The dollar index, measure the greenback against six peers, has weakened 0.05 percent to 93.894 from Monday. It has oscillated between 93.671 and the one-year high of 94.563, achieved on Tuesday for the past three weeks.
Since the past week, though, it has trended lower with a second hand tapering of Federal Reserve stimulus already priced in as early as next month, alongside a first interest rate increase next year.
A recovery in risk sentiment has also weighed on the safe-haven US currency.
A further message from the Bank of England was delivered on Sunday in support for early rate hikes by tweeting that the central bank will have to do something to counter rising inflation risk. On Monday, New Zealand was bets to become a faster policy normalist by data showing the fastest consumer price inflation in more than a decade.
The U.K. and New Zealand led a rise in short-term bond yields globally, with rates in Europe and Australia increasing comparatively more than those in the US, pressuring the dollar.
The sense that 'transitory inflation will last longer than previously thought has been the main catalyst as the market re-calibrated rate hike expectations in most jurisdictions wrote Westpac strategists in a research note.
However, the US is likely to be insulated by a domestic energy market bottleneck that is casting an ongoing cloud over rebound prospects in Europe and China, which should leave yield spreads at the front end continuing to drift in the USD's favour, said they adding that pullbacks in the dollar index should be limited to 93.70.
However, Westpac remains bullish on the kiwi currency - which is not part of the dollar index - trading a climb to $0.74 at year-end and recommends buying any dips to $0.6985.
The kiwi surged 0.11 percent to $0.7093, edging back toward a one-month high of $0.7105, reached on Monday.
The Aussie dollar gained 0.09 percent to $0.74225, approaching a more than one-month high of $0.7440 at the end last week, even after minutes of the Reserve Bank of Australia's September meeting showed on Tuesday that policymakers are concerned tighter policy could damage the labor market.
The euro advanced 0.09 percent to $1.16205, approaching the top of this month's trading range.
However, against the yen, the dollar was little changed at 114.275 but not far from the almost three-year high of 114.47 touched on Friday.
US manufacturing output was hampered as an ongoing global shortage of semiconductors depressed vehicle output, providing further evidence that supply constraints were hampering economic growth.
Our strong USD forecast published in early July reflected - among other things - US economic outperformance, but the USD driver can change, Commonwealth Bank of Australia strategist Joseph Capurso wrote in a consumer note.
The high in global inflation and interest rates may support the USD as a safe haven if short-term interest rates price in a global monetary tightening cycle that it forces equities to correct lower, with evidence of this scenario likely seen in a decline in USD JPY and AUD JPY, he said.