FOREX-Dollar drops broadly as U.S. data keeps Fed program in play
* Dollar falls after data dents growth optimism
* U.S. consumer sentiment tumbles, inflation not yet a concern
* Sterling rallies on BOE's King comments, yen at one-week high
* Concerns about Italy could pressure euro
By Julie Haviv
NEW YORK, March 15 (Reuters) - The dollar skidded from a seven-month high against a basket of currencies on Friday after U.S. data sapped optimism about the economy and affirmed expectations the Federal Reserve will continue its bond-buying program for the foreseeable future.
The greenback, poised to notch its first weekly loss against the euro in six weeks, succumbed to broad selling pressure as a slew of U.S. data prompted investors to book profits on recent robust gains.
While U.S. manufacturing output bounced back in February, other reports on Friday showed a spike in consumer inflation last month and subdued consumer sentiment in early March.
But gasoline accounted for about three quarters of the spike in consumer inflation in February, leaving the door open for the Federal Reserve to press ahead with its bond-buying stimulus, bearish for the dollar.
Recent better-than-expected U.S. data, namely jobs market gauges, helped propel a rally in the dollar for over a month as investors bet the Fed would reconsider its asset purchase program. The program is tantamount to printing money and therefore dilutes the dollar's value.
"It looks like we still have some scope to continue with QE," said Andrew Dilz, foreign currency trader at Tempus Consulting in Washington, referring to the Fed's bond-buying, or quantitative easing program.
The dollar index, which tracks the greenback versus a basket of currencies, fell 0.4 percent to 82.242. It had risen to 83.166 on Thursday, the highest since early August, buoyed by positive data on U.S. employment and consumer spending released over the past week.
The Fed meets next week and looks set to keep buying $85 billion a month in mortgage and Treasury bonds in an effort to encourage investment and bolster a weak economic recovery . The program is aimed at keeping long-term interest rates low, eroding the dollar's yield appeal.
Lately, the dollar has benefited from good news on the economy as expectations U.S. growth is outperforming other major countries have lured foreigners into U.S. assets.
The dollar's recent strength also coincides with a broad risk rally. That contrasts starkly to previous years in which the dollar would typically weaken on good data as investors sold the low-yielding U.S. currency in favor of emerging market stocks and commodities.
"We continue to believe that the relative performance of the U.S. economy will bolster the dollar over the medium term, especially versus currencies with central banks that are expected to adopt a more stimulatory stance, such as the yen and British pound," Barclays Capital wrote on Friday.
Nevertheless, sterling jumped after the Bank of England's governor suggested he did not want the British pound to fall any further.
BoE chief Mervyn King said its decline had gone far enough, although traders did not expect the pound's rise to last long given concerns about the UK economy and speculation of more monetary easing.
EURO UP BUT VULNERABLE
The euro gained on the prospect of EU leaders looking at short-term ways of boosting faltering euro zone economies.
The euro rose 0.4 percent to $1.3058, having hit a session high of $1.3107 on Reuters data and recovering from Thursday's three-month low of $1.2910.
Traders said the euro's failure to break below $1.29 encouraged profit-taking on dollar gains. Strong chart support is at the 200-day moving average at $1.2869.
Arne Lohmann Rasmussen, head of FX research at Dankse Bank in Copenhagen, said the euro could recover further towards $1.32 in coming weeks. Danske Bank forecast it to rise to $1.35 in three to six months but believe this will mark its peak.
Concerns about Italy could pressure the euro as the country's parliament convenes for the first time since last month's inconclusive election, with parties still deadlocked over how to form a government.
Investors would prefer Italy avoided new elections, a survey by Morgan Stanley showed. Stress began to show in Italy's bond market.
The dollar, meanwhile, fell 0.6 percent to 95.54 yen, with the Japanese currency helped by short-covering after a decline of about 10 percent this year. The dollar earlier fell to 95.06 yen, a one-week low.
Japan's parliament approved Prime Minister Shinzo Abe's nominee for central bank governor, Haruhiko Kuroda, and nominees for the two deputy governor posts, clearing the way for the radical monetary easing.
Kuroda's pledge to "act with speed" and do whatever it takes to hit the BOJ's new inflation target has some investors speculating he may summon a meeting even before the next scheduled policy review on April 3-4.
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