The dollar fell to a fresh three-year low Wednesday and the euro briefly rose above $1.49 as weaker-than-expected U.S. employment data convinced investors that U.S. interest rates would remain low this year.
The yen also hit a six-week high against the dollar after data showed the pace of growth in the dominant U.S. services sector also slowed unexpectedly in April, another sign the U.S. economy may be hitting a soft patch.
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With markets worried about a yawning U.S. budget deficit, traders said signs of slower growth will only add to trouble for the dollar, which fell to a three-year low against major currencies Wednesday. It has lost 7.7 percent in 2011.
"The dollar got beat up pretty badly against the euro," said Firas Askari, head of foreign exchange trading at BMO Capital Markets. "The U.S. fiscal situation is a concern. Now it seems the U.S. economy isn't just tepid but actually cooling off again. That's not encouraging."
But Askari and others said concerns about slower U.S. growth also dulled appetite for commodities and higher-yield assets for fear a U.S. slump would reverberate globally.
That sent the safe-haven Swiss franc to a record high against the greenback and drove the U.S. currency up against the Canadian dollar . Canada's economy is heavily depend on exports to its southern neighbor.
The euro remained fairly well supported in anticipation of higher euro zone interest rates and strong sovereign demand. Investors brushed off news that Portugal had become the third euro zone country in the last year to need a bailout and drove the euro to $1.4939, a 17-month high. It later eased to $1.4860 , up 0.3 percent and about a cent above the day's low.Traders said a move above $1.50 was likely but would probably have to wait until after Thursday's European Central Bank meeting, which should offer clues on future rate hikes.
The ECB raised rates in April for the first time since 2008 and is expected to do so again this year to tame inflation, even as higher rates make it more difficult for countries such as Portugal to service their debts.
"The currency market seems to have learnt to live with the struggles of the peripheral euro zone nations." said Audrey Childe-Freeman, currency strategist at JP Morgan Private Bank.
Markets do not expect the Fed to raise rates from near zero until the middle of 2012.
The dollar fell 0.3 percent to 80.68 yen . If it falls further, analysts said it could put markets on alert for official intervention to slow the pace of yen gains.
Major central banks actively sold the yen earlier this year after it hit a record high against the dollar. A strong yen could hurt Japan's export-led economy as it struggles with slow growth and the aftermath of March's earthquake and tsunami.
"People are watching that 80 level, which isn't very far away," said BNY Mellon strategist Michael Woolfolk.
The Australian dollar fell 0.8 percent to $1.0754, retreating from a post-float high above $1.10 as a decline in silver weakened demand for commodity-sensitive currencies.
Some gauges of market positioning suggest speculators and hedge funds are heavily short the dollar, leaving open the possibility of more position unwinding.
But the U.S. dollar has been unable to build on short-covering support seen in past days, and investors are likely to look for fresh selling opportunities.
"There are still no big incentives to go short euros," said Roberto Mialich, strategist at Unicredit in Milan. "At the end of the day, the dollar will be sold again, and it's just a matter of time for a test of $1.50."
(Additional reporting by Naomi Tajitsu in London; Editing by Andrea Ricci)