The dollar eased from a one-week high on Wednesday ahead of a speech by Federal Reserve Chair Jerome Powell, while optimism over a possible loosening in China's COVID restrictions set it on course for its biggest monthly loss since late 2010.
Euro zone inflation in November showed the first monthly deceleration since June last year, as harmonised consumer prices rose by just 10% last month, compared with expectations for an increase of 10.4% in November, and against October's final reading of 10.6%.
It is still more than five times the European Central Bank's target rate. But after almost two years of near-relentless acceleration in inflation, markets could welcome any sign that the worst may be over.
European assets got a lift on Tuesday after inflation in Spain and a number of major German states cooled.
The euro was last up 0.4% at $1.0366, lifting off a one-week low earlier on Wednesday at $1.0319. Against sterling, it fell 0.1% to 86.30 pence.
The U.S. dollar index, which measures the performance of the greenback against six major currencies, fell 0.37% to 106.48, down from an overnight high of 106.90.
It has lost around 4.3% in November, marking its worst monthly performance since September 2010, according to Refinitiv data.
Investors have ratcheted up their bets that inflation has peaked and the Fed will soon signal a shift to a softer stance on monetary policy, not least as the world tilts into a likely recession next year.Markets show investors are attaching a probability of 63.5% odds that the Fed raises interest rates by just half a point on Dec. 14, and a 36.5% chance of another 75 basis point hike.
New York Fed President John Williams said on Monday that the central bank needed to press forward with rate rises, and St. Louis Fed President James Bullard said there was still "a ways to go" for policy tightening.The dollar edged up 0.2% against the yen to 139.01 , as the pair continued to consolidate following a bounce from a three-month low of 137.50 on Monday.
Sterling rose 0.4% to $1.2002.
Meanwhile, in China, data showed manufacturing came in weaker than expected, as the government's zero-COVID policies continue to undermine economic activity.
The offshore yuan gained ground against the dollar, which fell 1% to 7.0802.
Chinese health officials said on Tuesday they would speed up COVID-19 vaccinations for the elderly, aiming to overcome a stumbling block in efforts to ease unpopular "zero-COVID" curbs, which had sparked vigorous protests in recent days.