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NEW YORK The dollar fell to record lows against the euro and a basket of currencies for a fourth straight day on Friday as yet another set of dour U.S. economic data left traders betting on an aggressive Federal Reserve rate cut next month.
A sharp decline in global and U.S. stocks knocked the dollar to an all-time low against the Swiss franc and pushed it to a three-year trough against the Japanese yen. However, short-covering into the weekend halted the dollar's slide against the euro.
Data showed U.S. consumer sentiment dropped to a 16-year low in February, while business activity in the country's Midwest contracted sharply, raising red flags for investors wary of a recession in the world's largest economy.
"The data was just dismal. The only good thing was that inflation didn't jump and that means there is room for the Fed to continue cutting interest rates," said Adam Fazio, senior currency strategist at CIBC World Markets in New York.
"When the PCE data didn't show an above-forecast tick in inflation, the market started to aggressively price in a 75-basis-point cut from the Fed on March 18."
The core personal consumption expenditures (PCE) price index is the Fed's favored inflation gauge. It rose 0.3 percent in January, in line with market expectations.
Short-term interest rate futures were showing a 70 percent chance of the Fed lowering its benchmark overnight lending rate by three-fourths of a percentage point at the March 18 monetary policy meeting.
The federal funds rate target is currently at 3 percent after being cut by 2.25 percentage points since mid-September.
The euro set a record high of $1.5238, according to Reuters data, before surrendering gains to trade down 0.3 percent at $1.5181.
The dollar index .DXY, which tracks the greenback's performance against a basket of currencies, hit a lifetime low of 73.560 before trimming losses to around 73.737, down 0.1 percent on the day. The index was poised for its biggest weekly loss in more than two years of 2.4 percent.
"The break of 1.50 was an extremely important market event; there is a scope to go further. Our target for euro/dollar is 1.58/59 over the next two months," said Fazio.
Economic woes coupled with Fed Chairman Ben Bernanke's warning about the health of some small U.S. banks on Thursday weighed on risk appetite to the benefit of low-yielding currencies like the yen and Swiss franc.
Low-yielding currencies such as the yen and the Swiss franc tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their respective countries.
The dollar fell to a historic low of 1.0408 Swiss francs, posting its biggest weekly decline since December 2000. The greenback touched a three-year low against the yen at 103.80 yen.
The dollar faces a major test next week, with the release of February's nonfarm payrolls and manufacturing reports, which could determine the size of next month's rate cut. A half-percentage-point rate cut has been fully priced in.
"We expect U.S. economic data to continue to signal a U.S. economic recession. Having broken the key 1.50 level, we expect EUR/USD to trade in a 1.50-1.55 range in the near term," foreign exchange strategists at UBS said in a research note.
(Additional reporting by Nick Olivari; Editing by Jonathan Oatis)