FOREX-Dollar slides vs euro, yen as U.S. data highlights weakness

Thu May 16, 2013 11:47am EDT

Related Topics

* Dollar curbs gains vs euro, yen after U.S. data

* U.S. jobless claims climb in latest week

* Dallas Fed President Fisher says inflation slowdown could buoy spending

* Weak euro zone inflation data adds to rate cut prospects

By Julie Haviv

NEW YORK, May 16 (Reuters) - The dollar dropped against the euro and Japanese yen on Thursday as a deluge of U.S. data highlighted vulnerabilities in the U.S. economy, curbing expectations that the Federal Reserve will scale back its bond buying program any time soon.

The dollar fell for the first time in six sessions against the euro after data showed the number of Americans filing new claims for unemployment benefits climbed last week to the fastest pace in six months, a worrisome sign for the economy, which has been hit by government austerity.

The Fed has made it clear that monetary policy will remain accommodative until they see broad and sustained growth in the labor market.

Other data showed a sharp drop in gasoline costs led U.S. consumer prices to tumble in April by the most in over four years. Meanwhile, ground-breaking for new U.S. homes plummeted more than expected in April from an almost five-year high.

"The dollar was on an uptrend headed into today's number, mostly due to an optimistic view of the U.S. economy," said Vassili Serebriakov, FX strategist at BNP Paribas in New York.

"The Fed has fallen short of its mandate on jobs and inflation, so the data highlights the need for further accommodation," he said. "The data also warrants a reconsideration of the bullish dollar view."

The euro was last up 0.1 percent at $1.2904, above a six-week low of $1.2842 hit on Wednesday when data showed the euro zone contracted for a sixth consecutive quarter.

"The dollar was overstretched in valuation and positioning, so it makes sense that we are now seeing a bit of an unwind," Serebriakov said.

Dollar losses accelerated in mid-morning North American trade after a survey showed factory activity in the U.S. mid-Atlantic region contracted in May as new orders fell to their lowest level in almost a year.

Dallas Federal Reserve Bank President Richard Fisher reacted to the U.S. inflation data.

A slowdown in U.S. inflation was benign and could "unleash" consumer spending, Fisher said, adding that he was not worried about the risk of deflation.

"The data today was broadly weak and overall it drives home the fact that the economic backdrop remains uneven, and that will keep the Fed's foot on the accelerator by continuing to engage in accommodative policy," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

"Talk about the Fed scaling back its asset purchases is premature, but we do expect it to happen sometime at the turn of the year," he said.

Meanwhile, falling prices in Germany and France highlighted the risk of deflation in the euro zone, which slipped into its longest ever recession at the start of this year, increasing the risk of more European Central Bank interest rate cuts.

"Data has highlighted weakness in the euro zone economy, including in core countries, and this will leave the euro vulnerable," said Ian Stannard, currency strategist at Morgan Stanley.

At the same time a firmer dollar trend was "very much in place", which could mean the euro drops towards the April 4 low of $1.2745 perhaps as early as next week. "Even if Bernanke dampens some of the pro-tapering enthusiasm it will only cause a temporary setback for the dollar."

Traders said investors were eager to buy dips in the dollar, which was expected to gain further while the yen continued to weaken following April's aggressive Japanese monetary easing.

Against the yen the dollar last traded down 0.2 percent at 101.98 yen, down from a session peak of 102.68 yen. It reached 102.76 yen on Wednesday, its strongest since late 2008, according to Reuters data.

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