Dollar Retreats as Riskier Overseas Assets Lure Investors

The dollar fell against most major currencies Friday, despite strong U.S. economic data, as calmer credit markets sparked renewed interest in riskier overseas assets.

The euro was on track for its biggest weekly gain against the greenback since mid-March and its best one-day performance since early July.

Fears that losses on bonds backed by deteriorating U.S. home loans were causing a liquidity squeeze had in recent sessions prompted investors to shed risk, sparking a safe-haven flow into the dollar.

But reports showing July U.S. durable goods orders growth recorded the biggest rise since September and a better-than-expected showing in new home sales helped calm market nerves, even though the data largely predated the start of the global liquidity squeeze in the past few weeks.

The U.S. economic data has reinforced "the calm that we're seeing in markets and contributing to downward pressure on the dollar and on the yen, which had been primary beneficiaries to the risk reduction that we have seen in recent weeks," said Todd Elmer, currency strategist with Citigroup in New York.

The reports also helped offset overnight news of Asian and European bank exposure to the U.S. mortgage sector, which briefly revived credit concerns.

The euro rose against the dollar. The euro was also up versus the yen. It was on pace for the largest weekly rise since March 2001, up 3 percent. A week ago, the euro had slipped below 150 yen, its lowest level in 2007.

Sterling rose while the high-yielding Australian and New Zealand dollars also gained.

The dollar recovered some ground in late trade to exit up slightly against the yen, though it spent much of the session below 116 yen.

The euro briefly trimmed its gains against the dollar after central bank sources told Reuters the European Central Bank is not necessarily committed to raising interest rates in September.

On Wednesday, the ECB said there had been no changes to its policy stance, which, when articulated by ECB President Jean-Claude Trichet on Aug. 2, hinted at a rate rise.

"The sources probably meant to add a bit of uncertainty, but we prefer to stick with the official word from the ECB, which was a signal for a hike," said David Powell, senior currency strategist at IDEAglobal in New York.

U.S. data on Friday showed durable goods orders in July hit were at their highest level since last September while sales of new homes rose by 2.8 percent.

Both numbers beat expectations, boosting both the major U.S. stock indexes and shorter-dated Treasury yields. On Monday, the one-month bill yield staged its biggest one-day drop since the stock market crash of 1987.

But some strategists said the next couple of months' data should provide a clearer picture of what impact the credit crisis is likely to have on U.S. and global growth.

"It is too early to get excited by positive data," said Divyang Shah, chief strategist at Commonwealth Bank in London. "It will not take much for the current fragile positive sentiment to turn around 180 degrees."