(Recasts, updates prices, adds byline)
By Lucia Mutikani
NEW YORK, Feb 29 (Reuters) - 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. For details, see
[].
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 <EUR=>, 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
<CHF=>, posting its biggest weekly decline since December 2000.
The greenback touched a three-year low against the yen at
103.80 yen <JPY=>.
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)
