The dollar fell to its lowest since mid-November on Thursday after the Federal Reserve disappointed investors hoping for a clear sign of a March interest rate rise, while the Australian dollar rallied after data showing a record trade surplus. Money markets had shown a 20% chance of a rise in U.S. rates next month but that slipped to as little as 15% despite the Fed sending a broadly upbeat message on the economy.
Aggressive language from the United States on Iran and a refugee deal with Australia also put the focus back on the geopolitical risks from U.S. President Donald Trump's administration rather than the expectations of higher inflation that dominated markets' initial thinking last year.
"The market has become increasingly sensitive to comments made by Trump himself or his advisers," said Alexandre Dolci, a strategist with BBVA in London.
"We have seen more and more anti-dollar jawboming from officials, especially targeting Germany, China and Japan. That has undermined the dollar in the past few days and is the main driver of dollar underperformance since the start of the year."
The dollar index has fallen steadily since the Fed raised rates in December and it hit a 12-week low in morning trade in Europe, although traders stressed it was not obvious it would fall much further ahead of U.S. jobs numbers on Friday.
"If anything had come along last night to reinstate the Fed element of the equation the dollar would have rallied," said Neil Mellor, a strategist with Bank of New York Mellon in London.
"But there are overriding fears about what the Trump administration is or isn't prepared to do about all these antagonistic issues. Until we know, worries about his attitude to the dollar are going to weigh on the market."
Against the yen, normally chief beneficiary of nerves about global security or political risk, the dollar fell 0.8% to 112.27, moving closer to Tuesday's low of 112.08. The euro hit an 8-week high of $1.0819.
"We're still seeing long-term guys buying the dollar on dips, expecting it to eventually recover on interest rate differentials between Japan and the U.S.," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. "But sometimes, it's a short-term market."
The weekly reading of client flows run by the market's biggest player, Citi, showed hedge funds selling the dollar chiefly for the euro or emerging currencies in the past week.
The Aussie added to gains in Asia to stand more than 1% higher on the day, driven by a recovery in exports in the fourth quarter that sent its current account surplus soaring and headed off any thoughts of a dip into recession.