The U.S. dollar fell broadly on Thursday, with the euro soaring to a two-month high above $1.29 as soft inflation and manufacturing data added to concern about the strength of the U.S. economy.

Data showing a third straight monthly decline in producer prices came a day after Federal Reserve meeting minutes revealed policymakers think they may need to do more to boost the economy if a sputtering recovery slows any further.

That helped push the euro to its highest against the dollar since May. The single currency, which slid below $1.19 in June on euro-zone debt trouble, has risen by more than 8 percent after smooth debt auctions in Greece, Portugal and Spain eased concerns.

Weak reports on New York and mid-Atlantic factory activity also hurt the dollar, as did Wednesday's data showing retail sales fell for a second straight month.

The data is going to give traders further reason to dump the dollar as the risk shifts from Europe to the United States, said Kathy Lien, director of FX research at GFT Forex in New York. Overall, U.S. fundamentals are making the U.S. less attractive to investors.

The euro rose 1.4 percent to $1.2917 EUR= for its best day in two weeks. Traders said efforts to cover bets against the euro that had built up in recent months have accelerated its rise, as did demand for overnight euro call options with strikes at $1.2825, $1.2835 and $1.2855.

Positioning and technical considerations suggest a move toward $1.30 is realistic, said Derek Halpenny, head of Europe currency research at BTM/UFJ.

The dollar also fell 1.2 percent to 87.46 yen JPY= and hit a 5-1/2=month low at 1.0402 Swiss francs CHF=. Sterling rose 0.7 percent to $1.5366 GBP=D4, just off a 10-week high.

TREND SHIFT OR SIMPLE SHORT SQUEEZE?

The dollar index .DXY, which measures the greenback against six major currencies, hit a two-month low and has now given back more than a third of its rally since last November.

Citing the weaker U.S. growth outlook, Goldman Sachs now forecasts the euro to trade at $1.22 in three months' time rather than $1.15, as it predicted in June. Its six- and 12-month forecasts are $1.35 and $1.38, respectively, compared to $1.15 and $1.25 a month ago.

But BNP Paribas strategist Sebastien Galy instead chalked the move up to frenzied short-covering on the euro and said a flat U.S. yield curve was encouraging Japanese investors to repatriate profits, thus boosting the yen.

On the yen, we may have a new trend developing with the market heading toward the dollar at 85, he said.

But he said the threat of debt trouble in Europe and the fiscal austerity budgets being adopted across the bloc will ensure sluggish euro-zone growth, keeping euro gains capped.

Soon someone is going to realize it's nonsensical to have a higher euro at a time when European governments are deflating, Galy said. Sure, the euro could go to $1.31 in the short term because speculators are aggressively short and any move up makes them jumpy. That's an appealing short-term trade and it makes no sense to fight it, but when markets look again at European fundamentals, we'll see a lower euro/dollar. For a graphic on dollar link.reuters.com/waj77m (Additional reporting by in Nick Olivari in New York and Jessica Mortimer in London; Editing by Kenneth Barry)

Portugal Retail sales BNP Paribas Inflation