US consumer prices rose less than expected in April, which would support gradual, rather than more aggressive, rate increases by the Federal Reserve.
"Given recent rises in oil prices, a weaker dollar earlier this year, and US tax cuts, markets were clearly worried more about upside risks in inflation," said Minori Uchida, chief currency strategist at MUFG Bank.
The so-called core CPI, which strips out the volatile food and energy components, rose 0.1 percent from previous month, compared to economists' median forecast of 0.2 percent rise.
It lodged year-on-year rise of 2.1 percent, matching March's increase.
The dollar's index against a basket of six major currencies stepped back to 92.71 from Wednesday's 4.5-month high of 93.42.
The euro jumped back to $1.1918 from Wednesday's 4.5-month low of $1.1823
The single currency has so far weathered the impact from rises in Italian bond yields on signs the country's two anti-establishment parties could sweep into power as they made "significant steps" towards forming a government.
While that would end almost ten weeks of political stalemate after an inconclusive election on March 4, investors cast a wary eye on a coalition of the 5-Star Movement and far-right League, which are hostile to European Union budget restrictions.
Against the yen, the common currency rose to 130.38 yen , extending its recovery from its six-week low of 129.24 yen set on Tuesday.
The dollar eased to 109.40 yen from Thursday's high of 110.02 yen and off its three-month top of 110.05 yen touched on May 2.
The Australian dollar, which had been hit by the loss of its long-cherished status as the highest yielding currency in the developed world as US rates have risen, bounced back to $0.7526 from Wednesday's 11-month low of $0.7413
The New Zealand dollar also bounced back from Thursday's five-month low of $0.6903 following a dovish tone from the country's central bank. It last stood at $0.6966.
The British pound had less luck, falling to $1.3460 on Thursday, its lowest levels in four months, after the Bank of England reduced its growth and inflation outlook for 2018 and 2019 while keeping rates steady as expected.
It was last fetching $1.3518.
The dollar's retreat should take the heat off some of emerging market currencies, which have been hit by worries about capital outflows to U.S, where yields are increasingly becoming attractive.
The Turkish lira stood at 4.2374 to the dollar, off its record low of 4.3780 hit on Wednesday.
The Malaysian ringgit steadied at around 4.0600 per dollar in offshore forward market, off near six-month low of 4.1350 touched on Thursday. The initial ringgit losses came amid some uncertainty after Mahathir Mohamad scored a stunning election win, defeating the coalition that has ruled the nation for six decades since independence from Britain.