The greenback also dropped from six-month highs against the yen and slid to a two-week trough versus the euro after the U.S. manufacturing report.
The Institute for Supply Management's (ISM) index of national factory activity fell to 48.1 in November from 48.3 in October, down for a fourth month. The reading was below expectations of 49.2 from a Reuters poll of 57 economists.
A separate report on Monday showed U.S. construction spending in October dropped as well, falling 0.8% as investment in private projects tumbled to the lowest level in three years.
"What this means for the dollar is that we could potentially see another rate cut from the Federal Reserve next year," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
The Fed has cut interest rates three times this year and at its last monetary policy meeting it signalled it would be data-dependent going forward.
"We could also require additional monetary stimulus and as a result yields are coming under a little pressure and you're seeing other counterpart currencies gaining," Schamotta added.
In late morning trading, the dollar index was last down 0.3% at 97.942 after dropping to 97.917, a two-week low.
The drop in the dollar index pushed the euro to a two-week high. It was last up 0.5% at $1.1070.
The dollar also fell 0.2% against the yen, to 109.12 yen, after hitting 109.72 yen, the highest since May.
Earlier in the session the greenback gained against the yen after an unexpected rebound in Chinese manufacturing activity lifted hopes of a brighter outlook for world growth.
Prior to Monday's U.S. manufacturing data, the greenback had been on an uptrend against the yen for the last few weeks, rising in seven of nine sessions.
The latest data out of China, the world's second-biggest economy, set the tone for currency markets. Chinese factory activity expanded at the quickest pace in almost three years in November, a private business survey showed on Monday, following upbeat official data over the weekend.
The survey also showed total new orders and factory production at buoyant levels.
In other trading, sterling <GBP=D3> was down 0.1% at $1.2920 as polls pointed to a narrowing lead for the governing Conservative Party before the UK's Dec. 12 election.
"There are increasing parallels with the way polls played out in 2017 with what we're seeing now, so that could cap the upside for sterling," said Jeremy Stretch, head of G10 FX strategy at CIBC capital markets, referring to the last UK election two years ago.
Graphic - New Zealand dollar: https://fingfx.thomsonreuters.com/gfx/mkt/12/9380/9292/NZ0212.png
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Dhara Ranasinghe in London; Editing by Dan Grebler)
By Gertrude Chavez-Dreyfuss