The euro fell against the dollar on Thursday after data showed inflation in the euro zone was not as high as investors had feared based on national readings in recent days.

Euro zone inflation eased to 8.5% in February from 8.6% a month earlier on lower energy prices, but still came in above a predicted 8.2% in a Reuters poll of economists.

But market reaction to the data was muted after the euro rose 0.9% against the dollar on Wednesday, its biggest daily jump in a month, after prices in German rose more than hoped last month.

The hotter-than-expected German inflation in February came after unexpectedly strong readings in France and Spain, reinforcing the case for the European Central Bank to keep raising interest rates.

"Inflation was clearly worse than forecast but maybe not as bad as feared given expectations had shifted following national data in the last few days," said Ben Laidler, Global Markets Strategist, Etoro in London.

"I think the base case is the ECB keeps on at a 50 basis point hike pace, which would still be pretty hawkish," he added.

The euro was 0.5% lower against the dollar at $1.0618.

Investors now see the ECB's 2.5% deposit rate rising by a combined 100 basis points in March and May, then to around 4.1% at the turn of the year. Markets have priced in an extra 50 basis points of hikes in just the past month.

Sterling was held back by remarks from Bank of England Governor Andrew Bailey, who said "nothing is decided" on future rate increases which had traders trimming back bets on higher rates. Sterling was down 0.46% to $1.1970.

The dollar index , which measures the U.S. currency against six others, rose 0.43% to 104.82, boosted by a rise in U.S. Treasury yields and after Federal Reserve official Neel Kashkari left the door open to a 50-basis point rate hike at the Fed's next meeting in March.

The yen fell 0.3% to 136.65 to the dollar, while the Australian and New Zealand dollars and the Chinese yuan moved lower after strong gains on Wednesday driven by Chinese manufacturing data showing factory activity in February grew at its fastest rate in a decade.

Investors are looking ahead to China's National People's Congress meeting, which begins on Sunday, for guidance on policy support for the post-COVID recovery.

"Yesterday's positive surprise in the PMIs for China in February are a positive for mining commodity prices and the currencies of countries that export them," said Commonwealth Bank of Australia's head of international economics, Joe Capurso.

"The yuan and commodity currencies such as the Australian and New Zealand dollars can rise materially if the meeting sends a pro‑growth signal, as we expect," he said.

Bitcoin slipped 1% to $23,400 as trouble at crypto lender Silvergate (SI.N) weighed on the mood.

Besides European inflation, euro zone employment and central bank minutes are due later in the day, as are U.S. jobless claims data.