U.S. Dollar Falls Sharply As Inflation Fears Ease

The U.S. dollar lost ground against its major rivals in the European session on Tuesday, as dovish remarks from Fed officials intensified hopes that the Fed will maintain interest rates lower despite inflationary pressures.

Dallas Fed Bank President Robert Kaplan said on Monday that a rate hike is unlikely to happen until next year.

The Fed will watch inflation closely and will do what it can to ensure that consumers' inflation expectations remain anchored near the central bank's 2 percent target, Kaplan added.

Federal Reserve Vice Chair Richard Clarida said during a webinar that the weaker-than-expected April payroll report showed the U.S. economy had not yet reached the threshold to warrant scaling back the central bank's massive bond purchases.

The Fed minutes, due on Wednesday, will be scrutinized for more details on policymakers' view on price pressures and any hints on when it might consider tapering of QE program.

The key U.S. economic reports due later in the day include U.S. housing starts and building permits for April.

The greenback depreciated to near 3-month lows of 1.2224 against the euro, 0.8965 against the franc and 1.4220 against the pound, reversing from its prior highs of 1.2148, 0.9035 and 1.4125, respectively. The greenback is seen finding support around 1.24 against the euro, 0.88 against the franc and 1.45 against the pound.

The greenback touched 6-day lows of 108.85 against the yen, 0.7814 against the aussie and 0.7257 against the kiwi, down from its previous highs of 109.28, 0.7757 and 0.7197, respectively. The currency is likely to face support around 105.5 against the yen, 0.80 against the aussie and 0.74 against the kiwi.

The greenback slid to a 6-year low of 1.2013 against the loonie, following an advance to 1.2073 at 5:45 pm ET. The greenback may locate support around the 1.17 level.

U.S. housing starts and building permits for April are due out in the New York session.