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NEW YORK (Reuters) - The dollar fell from a seven-month high against a basket of currencies on Friday after U.S. data dented optimism about the economy and reinforced expectations the Federal Reserve will continue its bond-buying program for the foreseeable future.
Strong gains in other currencies added to pressure on the dollar. Sterling jumped after the Bank of England's governor suggested he did not want the British pound to fall any further. The euro gained on the prospect of EU leaders looking at short-term ways of boosting faltering euro zone economies.
U.S. consumer sentiment tumbled to its lowest since December 2011 in early March, while manufacturing activity in New York cooled slightly. Separate data showed U.S. consumer prices rose in February as the cost of gasoline surged, but there was little sign of a broad pickup in inflation.
"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 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.
The dollar index, which tracks the greenback versus a basket of currencies, fell 0.6 percent to 82.139 .DXY. 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.
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.
In previous years, 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.
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, concerned they would just postpone economic reform and bring little hope of resolving a parliamentary deadlock. Stress began to show in Italy's bond market.
The dollar fell 0.9 percent to 95.29 yen, with the Japanese currency helped by short-covering after a decline of 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.
Sterling rose 0.3 percent to $1.5118. 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.
Additional reporting by Jessica Mortimer in London Editing by W Simon and Andrew Hay