A sharp contraction in August business activity in the US mid-Atlantic region and an unexpected 3.5 percent drop in existing US home sales last month heightened the market's aversion to risk, with the euro, Australian and Canadian dollars posting steep losses.

Wall Street shares and European equities were down big as well in the aftermath of the US numbers.

"Today was not a good day for weak Philly Fed data to be coming out as the market is trading more on emotions than value," said Ken Dickson, investment director for currencies at Standard Life Investments, with assets under management of more than $250 billion.

That said, Dickson, who's based in Edinburgh, thinks the global economy will not slide into recession as many seem to expect. "We think global growth will be soft, particularly in the developed markets, but we don't think the global economy will be moving into the double-dip area or an extended recession."

He said that in the medium to long term, Standard life remains bullish on the dollar including sterling currencies that have struggled as their fiscal deficits came into focus.

"The market has taken them (dollar and sterling) to levels that make them undervalued with market positioning also very low on these currencies."

Rumored intervention by the Swiss National Bank in the currency forwards market earlier in the European session had a brief impact on the franc, pushing it lower as the New York session started. The Swiss currency later surged in the wake of soft US economic numbers.

The ICE Futures dollar index was up 0.9 percent at 74.330, while the euro fell 0.9 percent to $1.43004, tracking a nearly 5 percent fall in European stocks.

The euro briefly trimmed losses against the dollar after US data showing a higher-than-expected rise in July consumer prices of 0.5 percent and a jump in the weekly jobless claims by 9,000 in the latest week.

Overall sentiment on the euro remains negative. A lack of more drastic measures from Tuesday's Franco-German summit to address the euro zone debt crisis and worries about a tax on financial transactions affecting the region's banks have kept the euro under pressure.

A Wall Street Journal report overnight saying that the Federal Reserve is scrutinizing European banks in the United States has also dented risk appetite in the market, contributing to a sell-off in equities.

The report also said the $2.5 trillion US money market funds industry, which supplies short-term dollar funding to banks, has retreated from the euro zone in recent months.

The dollar and euro traded mixed against the Swiss franc. The greenback edged higher to 0.79230 franc while the euro dropped 0.6 percent to 1.13355 francs. The euro had earlier climbed to 1.15150.

Both the euro and dollar initially gained on talk of SNB intervention in the forwards market, although the Swiss central bank declined comment.

Forward market intervention involves selling Swiss francs in short-dated maturities to flood the market with the currency, then buying them back or rolling them over at a later date.

Traders said by undertaking franc-selling in the forwards instead of in the spot market, the SNB was seeking to drive the return on holding francs even lower, making it less attractive to potential investors.

For now, intervention in the currency forwards market could slow the Swiss franc, but not for long, said Ray Attrill, senior currency strategist at BNP Paribas in New York.

"Sentiment on the euro is deteriorating sharply and the risk is that the Swiss franc could strengthen again."

The franc soared to record highs against the dollar and the euro earlier this month in a rush toward perceived safe havens sparked by euro zone sovereign debt worries and concerns about a global slowdown.

The dollar was flat against the yen at 76.510 yen, not far from its record low of 76.25 yen struck in March. The euro dropped 0.9 percent versus the yen to 109.515 yen.

Copyright Reuters, 2011