Dollar near three-month low verses euro on weaker rate outlook

The dollar hovered near a three-month low against the euro on Thursday, as investors continued to shun the US currency on a firming view that the Federal Reserve is in no rush to raise interest rates.
The dollar's decline was an extension of the sell-off sparked by Friday's weaker-than-expected US payrolls data and Tuesday's report showing a slower pace of expansion in the US service sector.
Such data bolstered the case that the Fed may be less aggressive than previously thought in following up its raising of interest rates last week.
"The dollar's broad weakness is a correction to its rapid rise prior to the Fed's decision to raise interest rates," said Mitsuru Sahara, vice president of the forex dealing group at UFJ Bank.
"It extended the fall when US economic data turned out weak and erased some of the market's expectations on future rate hikes," he The euro was at $1.2375, up from 1.2346 in late New York trade, and just shy of a three-month high of 1.2390 scaled on Wednesday.
The dollar was fetching around 108.70 yen versus around 108.63, showing little reaction to better-than-expected data for Japanese machinery orders, a key gauge of trends in capital spending.
Core machinery orders fell 2.1 percent in May from a month earlier, better than the median forecast of a fall of 3.8 percent in a Reuters poll of 27 economists.
Dealers said the yen failed to capitalise on the data partly due to investor caution ahead of Sunday's upper house elections in Japan.
"The dollar is inching up against the yen on speculation that the (ruling) Liberal Democratic Party will have a hard time at the election this weekend," said Tohru Sasaki, chief forex strategist at J.P. Morgan Chase in Tokyo.
A weak showing by the LDP could threaten the rule of Prime Minister Junichiro Koizumi - a favourite of foreign investors - or at least diminish his capacity to push through reforms, hurting the yen.
The dollar was also weaker against sterling, trading at around $1.8550 per pound and not far off a three-month low of around 1.8580 struck on Wednesday as the Bank of England kicked off a two-day policy meeting.