Dollar sags on subprime troubles

A trader in the Euro Dollar pit at the Chicago Mercantile Exchange in a file photo. The dollar dropped on Friday to three-month lows on concerns the growing crisis in the U.S. subprime mortgage industry could spread and hit economic growth.

NEW YORK (Reuters) - The dollar fell to a three-month low against a basket of currencies on Friday, weighed down by concerns the growing crisis in the subprime mortgage market could spread and curb economic growth.

Sentiment on the greenback had soured overnight, with investors worried that weakness in parts of the housing sector could seep into other markets and the broader economy, particularly after former Federal Reserve Chairman Alan Greenspan warned of such a risk on Thursday.

"I believe that what is going on in the subprime lending market is just hurting the dollar too much," said Manfred Wolf, director of corporate FX sales at HVB Bank in New York.

"Mr. Greenspan, with all due respect, is fueling the fire. I think overall the fate of the dollar depends on developments in the subprime sector and housing market," he added.

In late trading, the euro traded 0.6 percent higher against the dollar at $1.3318 EUR=, after rising to peaks around $1.3340. The dollar spent the early part of the New York session paring losses after data showed February U.S. industrial output exceeded expectations, while consumer inflation was tame.

Against a basket of six major currencies, the dollar was at its lowest since early December .DXY, but it later traded back up to 83.23, still down on the day.

The dollar was down 0.6 percent at 116.79 yen JPY= and fell around 0.8 percent versus the Swiss franc CHF= to 1.2072 francs.

The high-yielding Australian dollar was one of the biggest gainers on the U.S. dollar, rising 0.8 percent to US$0.7953 AUD=.

Investors have been worried about the U.S. economic outlook due to growing problems with U.S. financial companies that offer mortgages to high-risk borrowers. That has combined with existing risk aversion to rattle financial markets.

The dollar's sell-off shortly before the start of the New York session was swift enough to push the greenback below key technical levels, specifically against the euro.

"Once $1.33 was broken (in euro/dollar), it kind of opened the floodgates and everybody just jumped in," said David Hilgeman, foreign exchange analyst at online futures brokerage XPRESSTRADE in Chicago.

Dealers said with Friday's batch of economic data out of the way, the market will turn its focus to a Federal Reserve policy meeting next week. While U.S. economic data have been mixed lately, the housing sector continues to be a wild card for investors.

"Turmoil in the global financial markets and the specific trouble in the subprime residential mortgage market add to uncertainty at the Fed," said Stephen Gallagher, a U.S. economist, at Societe Generale in New York.

"Despite the questions surrounding the economic outlook, the Fed will reach the same conclusions as in the past. Rates will be left unchanged," he added.

The futures market has fully priced in two quarter-percentage point interest rate cuts by the end of the year.

U.S. government reports showed the core Consumer Price Index rose 0.2 percent in February, less than the 0.3 percent rise in January. Industrial output rose 1 percent last month, the largest gain in more than a year. The output report fueled some mild dollar-buying.