The dollar sank to a three-month low against a basket of currencies, weighed down by concerns the growing crisis in the U.S. subprime mortgage market could spread and curb economic growth.
Sentiment on the greenback had soured overnight, with investors worried that weakness in parts of the housing sector could seep into other markets and the broader economy, particularly after former Federal Reserve Chairman Alan Greenspan warned of such a risk on Thursday.
"I believe that what is going on in the subprime lending market is just hurting the dollar too much," said Manfred Wolf, director of corporate FX sales at HVB Bank in New York.
"And Mr. Greenspan, with all due respect, is fueling the fire. I think overall the fate of the dollar depends on developments in the subprime sector and housing market," he added.
In afternoon trading, the euro traded 0.3% higher against the dollar, after rising to highs of $1.3338. The dollar spent the early part of the New York session paring losses after data showed February U.S. industrial output exceeded expectations while consumer inflation was tame.
Against a basket of six major currencies, the dollar was at its lowest since early December, but later traded back up to 83.21, still down on the day.
The dollar was down 0.5% versus the yen and off 0.7% against the Swiss franc.
The high-yielding Australian dollar was one of the biggest gainers on the U.S. dollar.
Investors have been worried about the outlook for the U.S. economy due to growing problems with U.S. financial companies that offer mortgages to high-risk borrowers. That has combined with existing risk aversion to rattle financial markets.
Greenspan weighed in on the mortgage issue on Thursday, warning that problems in the subprime market could spread to other sectors.
Meanwhile, the dollar's sell-off shortly before the start of the New York session was swift enough to push the greenback below key technical levels, specifically against the euro.
"There were a lot of limit-stops placed into the system," said David Hilgeman, foreign exchange analyst at online futures brokerage XPRESSTRADE in Chicago.
"In the case of euro/dollar, once $1.33 was broken, it kind of opened the floodgates and everybody just jumped in," he added.
Dealers said with Friday's batch of economic data out of the way, the market will turn its focus to a Federal Reserve policy meeting next week. While U.S. economic data have been mixed lately, the housing sector continues to be a wild card for investors.
The futures market has fully priced in two quarter-percentage point interest rate cuts by the end of the year.
Earlier, U.S. government reports showed the core Consumer Price Index rose 0.2% in February, less than the 0.3% rise in January. Industrial output rose 1% last month, the largest gain in more than a year. The output report fueled some mild dollar-buying.