FOREX-U.S. growth worries hammer dollar to record lows

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By Veronica Brown

LONDON Feb 29 (Reuters) - The dollar hit record lows against the euro, Swiss franc and a basket of major currencies on Friday, pressured by concerns about the U.S. economy and expectations of further aggressive interest rate cuts.

A surprisingly large rise in weekly U.S. jobless claims on Thursday and confirmation that the world's biggest economy barely grew in the final quarter of 2007 fuelled recession worries.

That contrasted with upbeat releases from other countries.

Economic woes, coupled with Fed chairman Ben Bernanke's warning on the health of small U.S. banks on Thursday, also weighed on stock markets and risk appetite, to the benefit of low-yielding currencies like the yen and Swiss franc.

Bernanke told the U.S. Congress he expected "some failures" among small U.S. banks due to the financial stress of housing market woes and mortgage losses. [ID:nN28562945]

Analysts also said Bernanke's comments that the weak dollar was helping to shrink the United States' trade deficit were seen as a green light for continued dollar selling.

"We're seeing an overall globally weaker dollar on the U.S. economy and interest rate outlook. Bernanke also kind of suggested that he tolerates a weaker dollar as he said it was good the deficit was contracting," Commerzbank FX strategist Antje Praefcke said.

The euro set a record high at $1.5238 according to Reuters data EUR=, after powering through the psychologically key $1.50 mark on Wednesday.

The dollar index .DXY hit a record low of 73.560 and was poised for its biggest weekly loss in more than two years, of 2.5 percent.

Markets are now fully pricing in a 50 basis point rate cut from the Federal Reserve in March and are giving a more than 1-in-3 chance of a 75 basis point move FEDWATCH.

"The clean dollar bear trend looks set to continue and that could lead to a collision course with authorities if equity markets turn sharply lower again," ING said in a research note.

The dollar also hit a historic low at 1.0428 Swiss francs CHF= and a three-year low at 104.07 yen JPY=.

Some in the market said Japanese data released on Friday showing a surprising jump in consumer spending and rising consumer prices also helped to push the yen higher.

ECB VS FED

The perception of the European Central Bank seeming to give equal weight to rising price pressures and slowing growth stayed intact with the release of euro zone data on Friday.

The figures showed euro zone economic sentiment deteriorated to 100.1 in February from 101.7 in January -- a slightly steeper fall than the forecast decline to 101.2 -- but data confirmed food and energy costs fuelled a record surge in inflation in January.

The ECB, which wants inflation to be just below 2 percent, has said that anchoring inflation expectations was key to tame price growth after it took off in the last months of 2007.

Traders said the U.S. currency would continue to take a beating as investors speculate that the Fed may prioritise growth over inflation risks in the near term, clearing the way for further aggressive rate cuts after 225 basis points of easing since September.

Further direction could come from U.S. personal expenditure data due at 1330 GMT.

"The only way forward for the dollar is down as recent ranges have been broken completely," said a senior trader at a European bank.

(Editing by Gerrard Raven)