By Yumna Mohamed
LONDON (Reuters) - The dollar broke an 11-day winning streak on Thursday, falling back against the euro, yen and the basket of currencies that measures its broader strength after hitting its highest in a month a day earlier.
Analysts pointed to a mixture of unexpected drops in U.S. industrial output and home builder sentiment on Wednesday and a retreat of U.S. treasury yields from recent highs as possible drivers of the dollar fall.
That all ran counter to signals from U.S. Federal Reserve chief Janet Yellen, and a strong rise in January inflation numbers, which spoke for a rise in U.S. interest rates within months.
"Because the market is very reluctant to price more Fed tightening for this year and next, nominal yields are not rising as fast as inflation expectations are and therefore U.S. real yields have not moved in the dollar's favor in spite of the better data," BNP Paribas (PA:BNPP) strategist Sam Lynton-Brown said.
The dollar index was down 0.4 percent (DXY) in early European trade, falling to 100.81 from a peak of 101.76 on Wednesday after the better-than-expected U.S. inflation numbers and retail sales data.
Traders price in a 31 percent chance of a rate increase at the Fed's March meeting, up from 13 percent on Monday, according to the CME Group's FedWatch Tool.
Yellen hinted on Tuesday that more rate hikes were on the way as the jobs market has improved and inflation has shown signs of nearing the Fed's two percent goal.
Meanwhile, New York Fed President William Dudley on Wednesday reinforced the central bank's cautious optimism that President Donald Trump and the Republican-controlled Congress would not derail plans for gradual rate hikes in the months and years ahead.
Expectations Trump would deliver tax reforms and rises in infrastructure spending that would reflate the U.S. economy and spur the Fed to more action were at the heart of a surge for the dollar in the month after his election on Nov. 8.
But the dollar has struggled since, due at least in part to concerns over Trump's protectionist views and signs he may favor a weaker currency.
"We don’t have much choice but to wait and see what details on trade, tax and fiscal policy the new government will provide and to then try and evaluate the possible consequences and the Fed’s reaction," Commerzbank (DE:CBKG) analysts said in a note.
Markets will get another chance to check the U.S. economic pulse from another batch of data, including housing starts, building permits and the Business Outlook Survey by Reserve Bank of Philadelphia.
The dollar came off a 2-1/2-week high of 114.95 <JPY=> marked on Wednesday against the yen, touching a low of 113.73. It was last down almost half a percent at 113.66 yen.
The euro edged up over 0.3 percent at $1.0632, recovering from a five-week trough of $1.052 <EUR=> touched on Wednesday.
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