Dollar falters as Fed's interest rate view weighs

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The dollar stumbled on Friday, capping its worst weekly performance against the euro in more than two years, pulled lower by expectations U.S. interest rates will rise more slowly than previously expected.

The greenback also ended the week on a sour note against other currencies, with its largest weekly decline in two months against the and yen, two days after the Federal Reserve downgraded its forecasts for growth, inflation and interest rates. That doused investor expectations of a June tightening.

Jens Nordvig, Nomura's head of global foreign exchange, said one major reason for the sharp reduction in the Fed's rate forecasts was the strengthening of the dollar since the U.S. central bank's policy meeting in December.

"This shows the Fed is highly sensitive to large moves in the dollar and that further dollar strength has the potential to further delay any tightening," said Nordvig.

Analyst: Dollar will go higher

Despite the dollar's weakness, market participants say the decline is temporary and the U.S. currency would have pulled back anyway after steep gains over the last six months.

"This is just some counter-trend correction in the dollar and is transitory," said Mark Luschini, chief investment strategist, at Janney Montgomery Scott in Philadelphia.

"I still think the bias for the dollar is to strengthen particularly when you consider it's always against something else. And that something else are other currencies whose central banks are either cutting rates or initiating some form of quantitative easing."

In late trading, the euro was 1.5 percent higher against the dollar at $1.0827. It was up 3 percent this week, the largest weekly gain since October 2011.

In what could be the first signs of cracks appearing in what had been a united front among major banks, HSBC on Thursday raised its euro forecast to $1.20 by end-2017, arguing that the dollar's explosive rally was nearing its end.

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The dollar was down 1.5 percent against the Swiss franc at 0.9755, for a weekly drop of 2.8 percent. Against the yen, the dollar slipped 0.6 percent to 120.07, with a weekly decline of nearly 1 percent.

Commodity currencies gained against the dollar. The Australian dollar rose 1.5 percent to US$0.7773 and the New Zealand dollar was up 1.86 percent at US$0.7561, while the U.S. dollar was down 1 percent versus the Canadian currency at C$1.2571.