The dollar extended losses against the euro and Japan's yen on Thursday after data showed U.S. jobless claims rose, pending home sales plunged and manufacturing activity slowed, all signaling weakness in the country's economic outlook.
The European single currency had been higher before the U.S. data after Spain managed to sell out 3.5 billion euros ($4.3 billion) of five-year bonds.
The dollar index (DXY), a measure of the greenback against a trade-weighted basket of six major currencies, fell to 84.717 from 86.012 late Wednesday.
The euro (CUR_EURUSD) rallied to $1.2486, up from $1.2247 in North American trading late Wednesday. It hasn't topped $1.24 intraday since June 21.
The daily move weakened a recent trend where the dollar gained when stocks fell, as investors shifted out of assets deemed riskier and into the relative safe-haven of the greenback.
"As U.S. growth concerns mount, the greenback is no longer finding a safe-haven bid," said analysts at Action Economics. "To a degree, it appears the risk trade is being replaced with fundamentals."
Before the financial crisis, the main driver of currency markets was expectations about interest rates, because countries with stronger economies and higher interest rates were more attractive to investors and generally led to them buying the currency. Many analysts expect markets to revert back to that pattern, but it's been in fits in starts this year.
The dollar extended losses Thursday after a slew of weak U.S. economic data. The Labor Department said initial claims for jobless benefits rose 13,000 to 472,000 last week, confounding economists' expectation that applications would tick lower from the previous week.
Later, the Institute for Supply Management's manufacturing index fell to 56.2 in June from 59.7 in May, more than many analysts anticipated. A separate report showed pending home sales fell 30% in May.
"The problem in the current recovery is that it has largely been concentrated in the manufacturing sector and if growth in the sector slows, and it is, then there is no sector ready to take the growth baton," said Dan Greenhaus, chief economic strategist at Miller Tabak.
Earlier, the Spanish government sold the maximum amount of debt it was trying to auction. Bids received exceeded supply by 1.7 times, a ratio down from 2.35 times in a May 6 bond auction. The average yield rose to 3.657%, up from 3.532% at the May auction.
The auction came a day after Moody's Investors Service placed the nation's Aaa sovereign credit rating under review for possible downgrade.
"Although Spain had to pay up a higher rate than the previous auction the fact that it was able to place all of its allotment of 3.5 billion was viewed with relief by the market," said Boris Schlossberg, director of currency research at GFT. That "spurred a sharp short-covering rally in the currency market that took the pair through the $1.2300 handle."
The single currency temporarily edged back below the $1.23 level after the European Central Bank said it allotted 111.2 billion ($135.9 billion) in six-day loans at the benchmark rate of 1%. The operation came on the same day that banks must repay 442 billion in one-year loans.
"It seems that appetite for government debt remains alive and that fears for euro-zone sovereign risk maybe slimming at the margin," said Andrew Wilkinson, senior market analyst at Interactive Brokers.
Analysts said strong participation in the short-term tender muted support for the euro somewhat, although overall demand for loans in the six-day operation and in Wednesday's three-month tender came in below expectations. Still, concerns remain about funding pressures for European banks.
The euro lost 9.5% against the dollar last quarter, the worst performance since the quarter ended September 2008.
Meanwhile, the S&P 500 Index (SPX) lost 11.9% last quarter, and fell another 1% on Thursday.
Riksbank rates
Meanwhile, traders focused on the Swedish krona in light of the decision Thursday by Sweden's central bank to hike its key lending rate to 0.5%, up from 0.25% previously.
The euro sold for 9.6268 krone, a gain of almost 1%.
The Riksbank also offered a gloomy assessment of Swedish economic prospects.
While the Scandinavian nation's economy is developing "strongly," the Riksbank said it won't be hiking rates as "rapidly as we previously assumed" due to expectations that the 16-nation euro zone -- Sweden's main trading partner -- will take a hit as a result of budgetary belt-tightening.
British pound, Japanese yen
Turning higher in recent trading, the British pound (CUR_GBPUSD) rose about 1.3% to $1.5156 after having been slightly lower. Sterling changed hands at $1.4961 on Wednesday.
A purchasing managers index for Britain's manufacturing sector showed activity continued to grow at a fast pace in June, although it slowed from the 15-year peak seen in May.
The dollar also dropped 1.1% against the yen (CUR_USDYEN), reaching a two-month low as it fell to ��87.49 from ��88.48 on Wednesday.
The yen benefited from a stronger-than-expected headline figure in the Bank of Japan's quarterly tankan survey of business sentiment.
But sentiment in stock markets across Asia got undercut by disappointing Chinese manufacturing data, which indicated a slowdown in growth for the regional powerhouse. Broad-based selling in stocks sent risk-averse investors scurrying into the lower-yielding yen.
Copyright 2009 Dow Jones Newswires
Home construction fails to lift recoveryEuro Falls Below $1.20 on Hungary Fears
