Flash Purchasing Managers' Index (PMI) reports indicated a slowdown in the contraction of business activity across the eurozone in February.
The services sector, which accounts for a significant portion of economic output, broke a six-month losing streak. traders analyzed a series of business activity reports that were mostly better than anticipated to understand what these findings might mean for future interest rates.
As a result, the euro strengthened by 0.34% against the dollar to trade at $1.0856.
The single currency extended its gains after stronger-than-expected French PMI data but retreated slightly following disappointing figures from German data.
Sterling also saw a 0.3% increase against the greenback to reach $1.2674, driven by signs of continued momentum in the UK economy, as suggested by the latest British PMI data.
The yen's price remained stable against the dollar at 150.26.
Global Market Sentiment and Currency Trends
With these developments, the US Dollar Index, which measures the greenback against six major currencies, slid 0.3% to rest at 103.67 and was poised for a weekly decline of approximately 0.6%, marking its first such decline this year.
The mood among investors was optimistic as European and Japanese stock markets reached new highs on Thursday.
In the Nikkei's case, it surpassed its previous peak recorded in December 1989, marking a once-unthinkable recovery for a market that spent much of the last three decades mired in malaise.
Despite the weakness in the dollar index, it has still managed to rise by over 2% for the year as investors have reduced their bets on a series of interest rate cuts from the Federal Reserve.
Jane Foley, head of FX strategy at Rabobank, expressed confidence in the dollar's resilience, stating, "The dollar has come a long way, and the market is taking a breath and doesn't want to put on more dollar longs at this point."
We continue to think that the dollar will get a second wind.
Jane Foley
Later in the day, the release of US economic data, including PMI numbers and the ISM Manufacturing Index, could potentially influence the dollar's trajectory further.
What could potentially change that if we have a further build up of that debate about U.S. interest rates, and whether June (for the first rate cut) is realistic, and the next round of U.S. data is going to be instrumental.
Jane Foley
Despite scepticism about the durability of the US dollar's downturn, Foley predicted that the greenback would recover eventually.
Meanwhile, the risk-sensitive Australian dollar strengthened by 0.5% at $0.6584, while the Swiss franc (CHF) rose by 0.26% against the dollar to reach CHF 0.876.
The release of minutes from the Federal Reserve's latest monetary policy meeting on Wednesday reinforced the central bank's stance that rate hikes are still on the horizon despite recent economic data pointing towards inflationary pressures.
According to the CME FedWatch Tool, traders now anticipate only a 30% chance of the Federal Reserve implementing rate cuts as early as May, down significantly from over 80% a month ago.
This shift in sentiment is mainly due to recent data releases, such as the US producer and consumer price indices, which showed increased inflationary pressures and the labour market remaining resilient.
The exchange rate for the New Zealand dollar touched $0.6218, marking a one-month high on Thursday.
The Reserve Bank of New Zealand (RBNZ) is scheduled to meet next week, leaving many investors intrigued about the potential policy actions that could impact the Kiwi.
Although most analysts expect no change in interest rates, there is a chance the RBNZ might hike its rate, which would further strengthen the New Zealand dollar.
This uncertainty, coupled with the recent economic data releases and market sentiment, has added to the volatility in currency markets.
Overall, the market landscape remained complex as various factors, including economic data releases, central bank policies, and geopolitical risks, continued to shape currency movements.