Dollar drops as recovery hopes lift risk appetite

The dollar edged lower against major currencies on Friday, as a recent spate of upbeat U.S. data boosted expectations the global economy was reaching a bottom.

That has made investors comfortable buying higher-yielding currencies such as the Australian and New Zealand dollars as they pared back holdings of the safe-haven U.S. dollar.

"There's a bit of risk appetite with the S&P 500 bouncing off its 200-day moving average yesterday, and this has carried over to today," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "That's good news for the Aussie, Kiwi (New Zealand dollar), and Canada but bad news for the yen and U.S. dollar."

The positive outlook stemmed from Thursday's data showing the number of people staying on jobless benefits fell for the first time since January, while manufacturing in the U.S. Mid-Atlantic region shrank much less than expected in June.

Moves in the foreign-exchange market were limited, however, with investors awaiting a Federal Reserve policy meeting and economic data next week for more clues about the health of the global economy.

"The markets ... are in a holding pattern," said Gareth Sylvester, senior currency Strategist at HiFX in San Francisco. "There's no real consensus to drive the U.S. dollar fundamentally weaker or stronger. Overall, the market is still trying to second guess whether or not we're in a long-term bull market for equities."

In late New York trading, the euro was up 0.3 percent against the dollar at $1.3947 EUR=, after hitting a session peak of $1.4011, according to Reuters data.

The euro has lost momentum above $1.40, and analysts said the currency is still beset with Europe's economic outlook after the European Central Bank said this week that European banks may face another $283 billion in losses by the end of next year.

The dollar fell 0.4 percent to 96.22 yen JPY=, while the euro was down 0.1 percent at 134.21 yen EURJPY=R.

HIGHER-YIELDING CURRENCIES

Adding to recent optimism, International Monetary Fund First Deputy Managing Director John Lipsky on Friday pointed to signs the decline in global output has moderated and said the IMF is likely to revise up its 2010 economic growth forecasts.