Fri Jul 16, 2004
By John Parry

NEW YORK (Reuters) - The dollar slid to four-month lows against the euro on Friday, also falling against other major currencies after a trio of U.S. data reports signaled a softer-than-expected economy, underscoring the wide U.S. trade gap.

Core U.S. inflation was more muted than expected, reinforcing forecasts of moderate Federal Reserve interest rate hikes. Net inflows to U.S. assets were disappointingly low, drawing attention to the wide U.S. current account deficit.

Meanwhile, the University of Michigan sentiment report rose, but was shy of expectations, offering the dollar little support.

"The University of Michigan sentiment survey increased moderately, thus providing some sort of comfort regarding the consumer prospects following this week's decline in retail sales," said Ashraf Laidi, chief currency analyst with MG Financial Group in New York.

"But it will make no difference in the midst of the dollar decline which was caused by the ominous showing of the capital flows data," he added.

The euro's rally took the single European currency to peaks around $1.2460 according to Reuters data, the highest levels since early March, before trading off its highs at $1.2443, up about 0.7 percent on the day (EUR=: Quote, Profile, Research) around midday (1600 GMT) in New York.

Against the yen, the dollar fell 1 percent to session lows around 108.64 yen (JPY=: Quote, Profile, Research) , before trading around 108.68 yen.

Against the Swiss franc (CHF=: Quote, Profile, Research) , the dollar traded at 1.2257 francs, down about 0.9 percent.

Sterling (GBP=: Quote, Profile, Research) hit five-month highs around $1.8753 before trading at $1.8719, up about 1 percent.

The U.S. dollar fell 1 percent against the Canadian dollar (CAD=: Quote, Profile, Research) to session lows around C$1.3087, according to Reuters data.

The dollar's retreat started in earnest after a U.S. economic report showed a muted rise in core inflation, signaling the Federal Reserve is likely for now to keep its pledge to be "moderate" as it raises interest rates to keep the economy from growing too quickly.

The dollar then slipped further after data showing U.S. asset inflows declined in May were released. The Treasury Department said net capital inflows fell to $56.4 billion in May from revised net inflows of $76.0 billion in April.

"The (flows) report confirms market suspicions that the U.S. is having a difficult time funding its current account deficit," said Michael Woolfolk, senior currency strategist with The Bank of New York.

The wide current account deficit has been a persistent weight on the dollar over about the past two years. It mostly reflects the trade deficit, which puts downward pressure on the U.S. currency because buying foreign goods, like Japanese cars, causes billions of dollars to be expatriated each month.

Earlier, the dollar slipped against the euro after June U.S. consumer prices rose 0.3 percent, compared with economists' forecasts for a rise of 0.2 percent. But the "core" number which excludes food and energy costs, rose 0.1 percent, below forecasts for a rise of 0.2 percent.

If the Fed makes only moderate increases in U.S. interest rates as a result of such inflation reports, then that would likely detract from the allure of dollar-denominated assets for foreign investors.

At first, the dollar's slip against the euro after the CPI report was restrained by market positioning and by the sense that it did not stray too far from economists' expectations, some said.

Inflation has moved into the limelight now as the global economic recovery and steep oil prices threaten to push up consumer price growth in much of the industrialized world. (Additional reporting by Manuela Badawy and Gertrude Chavez in New York)

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