NEW YORK (AFX) -- The dollar sank to an 11-month low against the euro and a three-month low against the yen on Friday, after economic data boosted speculation that the interest-rate differential between the U.S. and euro zone will narrow soon.
U.S. first-quarter growth gross-domestic-product growth, employment costs, consumer sentiment and business activity in the Chicago area all came in below forecasts. The slew of economic reports added to evidence that the Federal Reserve is nearing the end of its interest-rate-tightening cycle.
'In general, the market seems to be in a sell-dollar mode' after Federal Reserve Chairman Ben Bernanke's testimony Thursday, said John McCarthy, director of foreign-exchange trading at ING Capital Markets. 'We believe that the Fed is about to be finished raising rates for the time being, while in the rest of the world rates are going higher.'
In late New York trading, the euro was changing hands at $1.2631, up 0.8%, after touching $1.2639, the highest level since May 20, 2005. The dollar weakened to 113.63 yen, the lowest level since Jan. 12. It was last down 0.3% at 113.84 yen. The dollar also weakened to seven-month lows against the British pound and Swiss francs. Sterling last traded up 1.3% to $1.825, while the dollar was down 1.7% at 1.2383 Swiss francs.
On the week, the greenback lost about 2.2% versus the euro and 2.4% versus the yen. In April, the dollar gave up 3.3% against the yen and 4.2% against the euro.
'The market was just looking for an excuse to sell dollars,' said Joel Ward, manager of the Joel Nathan ForexFund. 'As a trend wears down, traders are looking for a definitive reason to change their positions. Once Bernanke confirmed the end of the rate cycle in the middle of a broad dollar sell-off, the flood gates opened.'
Comments from U.S. Treasury Secretary John Snow that the G-7 communique reflects fundamentals also weighed on the greenback. In television interviews, Snow said the U.S. wants to see greater flexibility in China's currency, and Washington remains committed to a strong-dollar policy.
It was more an understanding that 'a weakening of the dollar would be very possible to be part of this adjustment process' of these large global imbalances, said David Solin, a partner at Foreign Exchange Analytics. 'People are starting to climb on the weak-dollar bandwagon. There's probably going to be more weakness.'
Data provide little support
'The data, on balance, just reinforced dollar negativity at this point,' said T.J. Marta, senior currency strategist at RBC Capital Markets.
The U.S. economy snapped back in the first quarter, growing at an annual rate of 4.8%, the Commerce Department said Friday. The increase in the nation's real GDP was close to market expectations of a gain of 4.9%, according to the survey of economists conducted by MarketWatch.
But inflation moderated. The core consumer price index (excluding food and energy) retreated to a 2% annual rate from 2.4%, pushing the year-over-year gain down to 1.9%, just below the top of the Federal Reserve's target range.
Separately, a Labor Department report showed the employment-cost index, considered one of the best gauges for tracking labor-cost pressures, moderated in the first quarter to a 0.6% increase, down from a 0.8% pace in the last three months of 2005. Economists had been forecasting a 0.9% increase in employment costs in the first quarter.
The inflation reports were 'benign and supportive of rates not going higher,' said ING's McCarthy.
The dollar further weakened after data showed consumer sentiment weakened slightly in late April. The University of Michigan consumer-sentiment index inched lower to 87.4 in late April from 89.2 earlier in the month, according to media reports Friday. The index was at 88.9 in March. Economists were expecting the index to inch lower to 89.
Adding to the downward pressure, business activity in the Chicago region grew at a slower pace in April. The Chicago purchasing-managers index fell to 57.2% in April from 60.4% in March. Readings over 50% indicate most firms are expanding. Economists expected the index to fall to 58.7% in April.
Further losses likely
The U.S. dollar has been under fire in April, weighed down by a combination of factors including the record U.S. deficit, foreign central banks diversifying their reserves, and a more aggressive outlook for interest rates in the euro zone.
The greenback's downward trend accelerated this week after the Group of Seven leading industrial nations called for 'vigorous action to address to address imbalances' and 'greater exchange-rate flexibility' and after Bernanke said the Fed could pause in its interest rate-increase cycle even if inflation risks remain.
'April has been a horrible month' for the dollar, said Marc Chandler, currency strategist at Brown Brothers Harriman, in a note. 'The overriding factor is bearish dollar sentiment. Further dollar losses are likely.'
But he added that 'while the weakness may carry into May, the pressures for a substantial correction are building, and the new month might not be as cruel.'
Joel Nathan ForexFund's Ward said from a technical perspective, the market is 'over-extended' and 'some consolidation is expected at the start of the week while the market catches its breath.'
Swiss francs rallies on comments, safe-haven
The Swiss franc was sharply higher after Swiss National Bank President Jean-Pierre Roth warned that further weakness in the Swiss currency would lead to further rate increases.
News that Iran failed to meet its deadline to halt uranium enrichment also provided support for the currency, which often gains on its safe-haven reputation amid geopolitical uncertainty.
Iran has failed to cooperate with U.N. inspectors, the BBC reported, and has done little to answer questions about its nuclear intentions. Friday marked the deadline for Tehran to halt uranium enrichment, which is a step toward creating nuclear energy or nuclear weapons.
Iranian President Mahmoud Ahmadinejad has said his country 'does not give a damn' about U.N. resolutions that seek to stop it from enriching uranium because of fears the country is planning to develop nuclear weapons, the BBC reported.
Upbeat euro-zone data
The euro advanced against the dollar after a string of upbeat economic data reinforced the case for a rate rise in June from the European Central Bank.
Consumer-price inflation rose 2.4% year over year in April from 2.2%, faster than forecast and above the ECB's goal of CPI near to 2%.
Separately, the money supply accelerated to 8.6% in March from 7.9%, well above the ECB's preference for 4.5% growth.
And finally, the European Commission's measure of both consumer and industrial confidence unexpectedly rose.
Adding to the euro's strength was a report that Finland's central bank boosted its euro holdings in its foreign-exchange reserves. This story was supplied by MarketWatch. For further information see www.marketwatch.com.