FOREX-Dollar weakens as bleak US outlook offsets G7 impact

(Updates prices, adds quotes)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 14 (Reuters) - The dollar slipped on Monday, surrendering earlier gains, as worries about a gloomy U.S. economic outlook outweighed the Group of Seven nations' heightened concern about currency volatility.

A surprise quarterly loss at Wachovia Corp. WB.N, the fourth-largest U.S. bank, added to bearish sentiment on the dollar. Merrill Lynch & Co Inc MER.N and Citigroup Inc (C.N) report quarterly results later in the week, and analysts say both banks may announce billions of dollars in write-downs.

The dollar gained briefly after data showed an unexpected rise in U.S. retail sales in March. But selling of the greenback resumed as investors focused on details showing that gasoline sales, sparked by higher prices, was a key to the overall gain, rather than strength in consumer spending.

"While the G7 statement helped garner modest short-term support for the greenback, cyclical factors remain negative for the dollar," said Nick Bennebroek, head of FX strategy at Wells Fargo in New York. "Factors include U.S. economic data continuing to point to recessionary conditions, reinforced today by soft retail sales figures reported out of the U.S."

In midday New York trading, the euro was up 0.2 percent at $1.5836 EUR=, above pre-G7 levels of around $1.5800 and well up from the post-G7 low around $1.5670.

Comments from European Central Bank officials clearly indicating the bank's lack of interest in cutting euro zone interest rates also supported the single currency.

ECB Governing Council member Yves Mersch on Monday was quoted as saying there's no room for rate cuts this year, while his colleague on the council Axel Weber said on Friday there's no scope for easing at present.

The dollar had earlier rallied in Asian trading after G7 finance ministers and central bankers on Friday highlighted sharp moves in major currencies since their February meeting. It was the first time the communique had mentioned major currencies since 2000 and the first time in four years the language on foreign exchange had changed.

Analysts said the statement should slow the dollar's decline, although this would not alter the currency's broadly weak trend.

"The focus of the statement is on exchange rate volatility, not levels, and we do not view this as materially supportive of the dollar," said Bank of America in its latest research note.

"The change in the communique's language may help forestall any aggressive dollar selling to take advantage of the G7's complete inaction...but (it) is not a new commitment to lead the dollar higher against major currencies."

Bank of America added that the dollar's outlook still very much depends on U.S. growth and Federal Reserve policy. "When the U.S. economy stabilizes, the dollar can stabilize."

Against a basket of major currencies, the dollar fell 0.8 percent to 71.703 .DXY.

The dollar fell 0.2 percent against the yen to 100.74 JPY=, weighed down by the unexpected first-quarter loss at Wachovia. Investors tend to buy yen when there is heightened risk aversion in the market.

Amid deepening U.S. economic weakness and financial sector stress, the Fed is widely expected to lower interest rates from the current 2.25 percent later in April, adding to the 3 percentage points of cuts it has administered since September in a bid to shore up growth.

In contrast, markets expect the ECB to keep interest rates at 4.0 percent for some time. (Additional reporting by Jamie McGeever in London; Editing by Leslie Adler)