The dollar slipped one per cent from this week's three-month peaks versus the euro as a recovery in equities reduced its safe haven appeal and talk of a euro zone rate cut raised optimism about Europe's growth outlook.
The euro was the biggest beneficiary of the dollar's broad based retreat, helped by European Central Bank officials' comments which stoked the rate cut talk.
European rate cut talk increased after Bank of France governor Mr Jean-Claude Trichet said today that the ECB was no longer worried about inflation and that Europe was clearly feeling the impact of a US economic slowdown.
Traders said Mr Trichet's remarks helped buoy the euro by raising the chances of an imminent cut in euro zone rates that would bolster the region's economy.
Mr Trichet's comments echoed those of ECB chief economist Mr Otmar Issing, whogave the clearest sign yet that the bank was leaning in favour of a rate cut when he conceded forecasts for euro zone growth may have to be lowered.
Benign February inflation data from Germany's regions also supported the view that the ECB was likely to cut rates sooner rather than later, dealers said.