* New York Fed’s Empire State manufacturing index slows in Feb
* Yen hits three-week low against euro
* Bank of Japan holds policy steady
By Sam Forgione
NEW YORK, Feb 18 (Reuters) - The dollar on Tuesday fell against the euro to its lowest in seven weeks after a gauge of manufacturing in New York state slowed in February, stoking uncertainty about the direction of the Federal Reserve’s monetary policy.
The New York Fed’s “Empire State” general business conditions index fell to 4.48 in February from 12.51 in January. Economists polled by Reuters had expected a reading of 9.0.
“The data have been pointing to a loss of momentum in the economy and have raised doubts about the trajectory of Fed tapering,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Janet Yellen, in her first public comments as Fed chief on Feb. 11, emphasized continuity in the U.S. central bank’s policy strategy of cutting asset purchases by $10 billion a month, but some suspect the Fed could slow the pace of its reduction in stimulus following weak U.S. economic data.
The euro rose to $1.3769, marking a seven-week high against the dollar and surpassing a key resistance of $1.3740. The euro barely reacted to a mixed German ZEW survey of analyst and investor sentiment. It was last at $1.3756, up 0.4 percent on the day.
“The momentum has been in favor of the euro,” said Mark McCormick, foreign exchange strategist at Credit Agricole in New York.
The euro also raced to a six-week peak against the Swedish crown of 8.9180 crowns after consumer prices in Sweden fell more than expected in January and revived talk of an interest rate cut.
The euro rose as well against the British pound to trade at 82.37 pence after softer-than-expected UK inflation data.
The yen, meanwhile, fell to its lowest in nearly three weeks against the dollar and the euro after the Bank of Japan held policy steady, as expected, and extended a special lending programme to support the economy.
In an attempt to get Japanese banks to lend more, the BOJ decided to extend three special loan facilities by one year. It also raised the maximum amount of the loans and said financial institutions would be able to borrow funds at a fixed rate of 0.1 percent over 4 years instead of 1-3 years at present.
The measures were seen as an inclination to ease monetary policy and sent Japanese stocks higher and the yen lower. BOJ chief Haruhiko Kuroda said the economy was moving in line with the central bank’s assessment, suggesting no further easing steps were likely in the near term.
The Nikkei stock average ended 3.1 percent higher, pushing the yen lower. The dollar was up 0.41 percent at 102.36 yen, having hit a February high of 102.73, while the euro was up 0.75 percent at 140.76 yen.
“The actions overnight by the Bank of Japan are a signaling tool that they’re willing to ease policy further later in the year,” said McCormick of Credit Agricole.
McCormick said the BoJ’s monetary policies are lowering interest rates, driving investors to seek higher yields in regions such as the United States and the euro zone, which in turn has weakened the Yen currency.
In other currency pairs, the dollar hit a seven-week trough against the Swiss franc at 0.8868 franc.