The US dollar fell broadly on Thursday as better-than-forecast European economic data boosted equities and spurred appetite for risk, with a drop in US lending rates putting additional pressure on the currency. The dollar had earlier fallen close to a seven-month low against the yen, hit last week, on downbeat comments from Federal Reserve Chairman Ben Bernanke the previous day, who said the US economic outlook was "unusually uncertain".
The subsequent release of strong European purchasing managers surveys, together with robust UK retail sales revived risk sentiment, putting the dollar under selling pressure. "The PMIs out of Europe have been very good and equity markets are rallying. I think this is a risk-driven move," said Paul Robson, currency analyst at RBS.
At 1130 GMT, the dollar was trading down around 0.8 percent versus a currency basket at 82.719 after slipping to a low 82.624. Analysts said a fall in dollar lending rates was adding pressure to the currency, as three-month dollar Libor fell below 0.5 percent for the first time in two-months.
The dollar fell to a 2-month low versus the high-yielding Australian dollar with traders saying an option barrier had been targeted at $0.8880 en-route to the $0.8899 high. Further barriers were reported at $0.8900. The euro rose over 1 percent from New York closing levels to reach a session high of $1.2877 having fallen to $1.2739 in early dealing. European stocks traded with gains of around 1.4 percent.
Attention focused on the release of European bank stress test results, due at 1600 GMT on Friday although some sources said they may be released earlier. The euro has had a good run against the dollar in anticipation of the test results, rising to a 10-week high above $1.30 on Tuesday as, traders bet most of the 91 European banks being examined would pass. "The market has certainly bought the rumour going into this week that the stress tests will be positive and people have been going long euro/dollar, with weak US economic data making it look like a no-lose situation," said Lauren Rosborough, currency strategist at Westpac.
The dollar was down 0.4 percent at 86.78 yen after slipping to 86.35, extending losses in the wake of a 0.5 percent fall on Wednesday. Traders said stop-losses were placed below last week's low of 86.27, though strong bids were then said to be layered into 86.00.
The rise in the yen, which gained steeply on the crosses on Wednesday, has been hampered by caution that Japanese policymakers may try to talk it down as it nears a 14-year high around 85 yen per dollar hit last November.
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