A batch of softer US economic indicators has prompted traders to scale back expectations for Federal Reserve rate hikes, pushing the Bloomberg Dollar Index to its weakest point since May. The Canadian dollar briefly strengthened following a report showing Canada's inflation rate climbed to 3% in July.

The Bloomberg Dollar Spot Index slipped 0.1%, after dropping as much as 0.3% earlier in London trading. The gauge touched its lowest level since May 15 before paring those losses. Yields on 10-year US Treasuries edged up 2 basis points to 4.71%, while money markets now price in only about 38 basis points of tightening over the current cycle.

Manufacturing activity in New York state expanded in August at the fastest pace since late 2021, supported by solid growth in orders and a strong backlog of unfilled orders. Following the release of Canada's July CPI report, the loonie gained as much as 0.2% to hit its intraday high, with USD/CAD touching 1.3845 before giving back those gains and trading roughly flat.

"Even so, the Bank of Canada can afford to remain patient, as underlying inflation remains close to the 2% target," noted Elias Haddad of Brown Brothers Harriman.

USD/JPY fell 0.3% to 158.85 before recovering to trade nearly unchanged at 159.40. Japan's economy grew at a slower-than-expected pace in the three months through June, as persistent uncertainty stemming from Middle East conflicts continued to weigh on corporate capital spending.

EUR/USD rose for a third consecutive session, gaining 0.1% to 1.1585, with one-week risk reversals widening to 11 basis points—the most bullish reading in six months. GBP/USD added 0.1% to 1.3556, after earlier touching a three-month high.