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Dollar falls as weak U.S. data support gradual rate-hike view

U.S. Dollars
Bay Ismoyo | AFP | Getty Images

The dollar fell broadly on Thursday as a plunge in U.S. durable goods orders supported the view of weakening U.S. growth due to softer global demand, which may cause the Federal Reserve to raise interest rates at a slower pace than it had previously signaled.

The much weaker-than-expected reading in durable goods orders, which fell by the most since August 2014, raised the prospects of a lower-than-expected U.S. gross domestic product number on Friday.

A weak U.S. GDP figure, combined with the global equity market volatility that has plagued investors so far in 2016, would greatly reduce the likelihood that the Fed would raise interest rates four times as it had suggested back in December.

Read More Market reacts to sharp decline in durable goods orders

Crude oil futures also rebounded on Thursday, rising to their highest in three weeks and boosting oil-linked currencies such as the Australian and Canadian dollars.

The bump in oil as well as the Fed's expected hold on future rate hikes pushed investors into the higher-yielding currencies.

"Markets seem to be grappling with the fact that (the Fed is) not going to be tightening aggressively," said Jonathan Lewis, founding principal of Samson Capital Advisors in New York. "If the Fed is most likely to hold off or not tighten aggressively, then we can begin to think about moving from risk-off to risk-on (trading)."

In risk-on trading, investors prefer such currencies as the Aussie, loonie and kiwi, which boast high interest rates but are also largely tied to commodities, making them more prone to large-scale falls in value.

""This is a terrible number, in my opinion. Couple that in with retail sales over the holiday - they didn't knock it out of the park - and it's quite possible that the Q4 GDP is going to disappoint."" -Fabian Eliasson, vice president for currency sales at Mizuho Corporate Bank in New York

The Australian dollar set a three-week high against the U.S. dollar, but was last down 0.04 percent at US$0.7083.

The U.S. dollar fell against the Canadian dollar, dropping below C$1.40 for the first time in three weeks. It was last down 0.35 percent at C$1.4046.

The kiwi rose more than 1 percent against the dollar, last flat at $0.6478.

The expectation of a restrained Fed also boosted European currencies against the dollar, said Eric Viloria, currency strategist at Wells Fargo.

"In some of the more recent data out of the U.S., with the exception of employment, we have seen softening in economic figures," Viloria said.

The euro touched its highest against the dollar since Jan. 20, last at $1.0936.

Sterling, also backed by in-line GDP figures showing modest economic growth in Britain, was last at $1.4357.

The dollar index, which measures the dollar against a basket of currencies, fell to its lowest in two weeks. It was last down 0.3 percent to 98.61.