The dollar fell broadly on Friday as fears of further write-downs in the US financial sector raised speculation the Federal Reserve would not signal a shift toward tighter monetary policy when it meets next week. Rising oil prices, more inflation-busting talk from a European Central Bank official and an unexpected surge in German producer prices in May to a near two-year high added to selling pressures on the greenback.
These developments were seen as confirmation that the European Central Bank would deliver an interest rate hike next month, flagged at the bank's last policy meeting. A hike would further enhance the euro's yield appeal against the dollar.
"The dollar is ending the week on a negative tone," said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto. "Write-downs on Wall Street may not be over and the US economy is not strong enough to support a series of rate hikes despite the Fed's hawkishness."
Fed Chairman Ben Bernanke's tough inflation talk boosted the dollar in recent weeks, but analysts reckon that signs of more turmoil on the US financial sector could prevent the central bank from following the hawkish words with action. The Fed meets on June 24-25 and is widely expected to leave the fed funds rate target at 2 percent after slashing it by 3.25 percentage points since September. US interest rate futures have reduced the chances of a 25 basis points rate increase in August to about 40 percent from 48 percent. Expectations of a year-end rate hike have also been trimmed.
Late on Thursday, Moody's Investor Service downgraded the insurance arms of Ambac Financial Group and MBIA Inc. On Friday, Merrill Lynch cut the 2008 earnings estimates of US large-cap regional banks, citing higher loan losses and reserve building.
The New York Board of Trade's dollar index, which tracks the dollar's performance against a basket of six currencies, dropped to a session trough at 72.932, the lowest level since June 10, according to Reuters data. It was poised for its largest weekly loss since March 30. The euro jumped to an intraday peak of $1.5651. It was last up 0.7 percent at $1.5616.
Oil prices earlier topped $136 a barrel, rebounding from Thursday's sharp sell-off after China's move to raise fuel prices. Analysts said the thinking in the market was that China's fuel price increase may actually boost demand.
The dollar has tended to fall when oil prices surge due to speculation that oil-producing countries may use the increased dollar-denominated windfall from crude exports to buy euros and other currencies to diversify their portfolios. Worries about the health of the US financial sector knocked stocks and sent the dollar tumbling against the Japanese yen. The dollar fell as low as 107.14 yen. It was last down 0.8 percent at 107.17 yen.