NEW YORK (Reuters) - The U.S. dollar retreated after hitting its highest level in two years as weaker domestic data and the threat of economic fallout from the trade war with China increased expectations for an interest-rate cut this year.

FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee

Against a basket of six rivals, the dollar erased gains made earlier in the day, last trading down 0.16% at 97.885. The dollar move pulled the euro with it, which was up 0.22% to $1.118.

Sales of new U.S. single-family homes fell from near an 11-1/2-year high in April as prices rebounded and manufacturing activity hit its lowest level in almost a decade in May, suggesting a sharp slowdown in economic growth was underway.

Some of the loss of momentum is the result of the escalating U.S.-China trade war, which economists say is undermining business confidence, as well as sluggish growth overseas.

“There was a lot of discussion today about interest-rate differentials, even in this risk-off environment,” said Marvin Loh, senior global markets strategist at State Street Global Markets.

“While U.S. rates can come down a whole lot more, the rest of the world can’t come down as much because they’re already so low. That’s driving the dollar trade even though we have this pretty strong risk-off move in stocks.”

Loh added that the move was being driven by the dollar, rather than a euro pulled lower by weak economic data from the currency bloc. G10 currencies, in addition to the euro, were weaker, suggesting a dollar effect.

Market expectations that the Federal Reserve would cut interest rates increased on Thursday, according to the CME Group’s FedWatch tool. There is only a 36.2% expectation that rates will be at current levels in October of this year, down from 50.8% yesterday.

Worries over German manufacturing, the impact of a trade war on Asian economies and deepening concerns over Brexit and European parliamentary elections have broadly curbed risk appetite and sent investors to perceived safe-haven assets.

U.S. stocks were lower, and safe-haven currencies such as the Japanese yen and the Swiss franc were up, 0.72% and 0.64% respectively.

Activity in Germany’s services and manufacturing sectors fell in May, a survey showed on Thursday, reflecting the toll that unresolved trade disputes are having on Europe’s largest economy.

Compounding these worries, European parliamentary elections began on Thursday with euroskeptic parties expected to do well, raising concerns about the single currency’s stability.

Brexit uncertainty has set sterling up for its 14th straight day of losses against the euro - its longest losing streak in the 20-year history of the single currency.