Dollar ends day flat, but worst week in two months

By David McMahon

NEW YORK (Reuters) - The dollar steadied on Friday, holding little changed against the euro and the yen, but still set to post its steepest weekly decline in two months against a basket of major currencies.

The greenback fell in early U.S. trade after data showed a sharp decline in U.S. housing starts last month, but later recovered some ground as trading activity wound down ahead of a long weekend in the United States.

A spate of weak U.S. economic reports this week, capped on Friday by a slide in a benchmark gauge of consumer confidence, has advanced the case for the Federal Reserve to cut interest rates later this year.

"We're seeing that U.S. data is beginning to weaken," said Kathy Lien, chief strategist at DailyFX.com in New York. "It's confirming the Fed's indication to us that we need to see more growth and more signs of inflation before raising rates."

The dollar was up about 0.05 percent at 119.20 yen JPY= in late New York trade, recovering from a one-month low of 118.98 hit on electronic trading platform EBS after a government report showed the pace of U.S. housing construction posted its sharpest monthly decline since October.

The euro was a touch weaker on the day at $1.3135 EUR=, below a six-week high of $1.3173 hit on Thursday.

In a lackluster session, one notable gainer was the New Zealand dollar, which rose 0.6 percent to $0.6980. That brought the kiwi dollar's gains to more than 2 percent on the week, with the currency supported by continued expectations that New Zealand's central bank will raise interest rates next month.

The dollar was still down about 2 percent against the yen on the week and looked set to record its biggest one-week drop since May against the Japanese currency.

The yen rallied this week after data that showed Japan's economy grew at an unexpectedly brisk pace in the fourth-quarter. The numbers boosted expectations that the Bank of Japan will raise interest rates a quarter percentage point next week from 0.25 percent at present.

Analysts see a roughly 50/50 chance that the BOJ will raise rates at its meeting on February 20-21, a Reuters poll shows.

The dollar index. .DXY, which measures the dollar's value against a basket of the currencies of six major trading partners, was barely changed on the day. The index fell 1 percent over the week, its largest weekly decline since early December when it posted a weekly fall of almost 1.5 percent.

Data showing weak manufacturing output, a wider trade deficit in December and a shortage of capital inflows that month to finance it have all weighed on the dollar this week.

On Friday, the Reuters/University of Michigan Survey of Consumers said its preliminary February consumer sentiment index unexpectedly declined to 93.3 from 96.9 in January.

The run of soft economic data has exacerbated the dollar's losses, which were initially sparked by Fed Chairman Ben Bernanke when he told Congress earlier in the week that inflation appeared to be easing.

Producer prices excluding food and energy rose just 0.2 percent in January, in line with forecasts, data showed on Friday. The more closely watched U.S. consumer price report is due next week.