Dollar under pressure, euro at 16-month high

A one Australian dollar coin ($1.09) is seen in this picture illustration taken in Sydney April 29, 2011. The Australian dollar consolidated near recent highs against a broadly weaker U.S. currency on Friday and within spitting distance a huge chart objective at $1.1000, having enjoyed its best month so far this year.

NEW YORK (Reuters) - The U.S. dollar hit a three-year low against a basket of major currencies on Friday, with month end capital flows likely to see further selling of the greenback as the Federal Reserve keeps short term interest rates near zero.

By contrast European Central Bank has raised rates, boosting the euro by 11 percent so far this year.

The U.S. dollar index .DXY hit a three-year low of 72.834 on Friday and has now fallen for five straight months, with April posting a 3.8 percent April decline.

"It's pretty close to a one-way bet (on the dollar), but in foreign exchange markets, anything can happen," said Chris Turner, head of foreign exchange strategy at ING Commercial Banking in London. "U.S. monetary policy is reflationary policy which is great news for the commodity currencies and frames the weak dollar."

The euro rose about 4.6 percent against the dollar in April for its best month since September. The dollar fell 2.5 percent this month against the yen, its worst month since December.

On Friday the euro was buoyed by stronger-than-expected euro-zone inflation data that increased the chance of another ECB rate rise. Trading was thinned by a holiday in the U.K. for Britain's royal wedding.

The euro closed around $1.4816, little changed on the day but still near its highest since early December 2009.

The U.S. Labor Department will publish its April employment report next week, and analysts at Citigroup said dollar bearishness should persist.

"It is hard to be optimistic on the (dollar's) long-term prospects, given the Fed's ability to surprise on the dovish side, the ongoing overhang of U.S. dollar assets among reserve managers and the concerns that have emerged on long-term U.S. fiscal prospects," CitiFX said in a research note.

Overextended speculative positioning suggest the dollar's decline may slow next week, according to Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"However, with the Fed sending a strong dovish message, we see few significant triggers for an immediate dollar turnaround," he said.

The Swiss franc was buoyed by upbeat comments from the Swiss National Bank's chairman and an above-forecast Swiss sentiment survey.

The Swiss franc rose to hit a record high of 0.86256 francs per dollar on EBS. Speculators remained net long the Swiss franc to the tune of 17,841 contracts, according to CFTC data. The euro ended the week down about 1.0 percent at 1.2820 francs.

Against the yen, the dollar was down 0.6 percent at 81.07 yen. The net short yen position dropped by 15,986 contracts to 36,997 from 52,983 the week before, according to CFTC data. Most of the shift was from a decline of 14,858 total short contracts to 51,060 contracts.

Euro resistance was expected around $1.4905, the peak in December 7 2009, with a substantial options barrier at $1.5000. Beyond $1.5000, the key target was the 2009 high of $1.5145, analysts said.

One-month euro/dollar risk reversals last traded at -1.3 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise.

But the same measure traded at -1.48 on Tuesday, which indicates relatively less bearishness, the day before Federal Reserve Chairman Ben Bernanke hosted his first-ever post-policy decision news conference.

Still, euro long positions rose to 68,279 contracts in the latest week, the highest since December, 2007, according to data from the Commodity Futures Trading Commission released on Friday.

(Reporting by Nick Olivari)