Dollar falls versus euro

The dollar fell against the euro and yen on Friday, the last trading day of the quarter, with investors shunning the currency ahead of a holiday-shortened week in the United States. Demand for the dollar has been waning since Thursday, when the Federal Reserve left benchmark interest rates unchanged and said core inflation had eased a bit, boosting the view that overnight rates will remain at 5.25 percent for some time.
This helped depress implied volatility on currency options, a prerequisite for putting on carry trades, in which dealers borrow in low-yielding currencies and buy assets in units offering higher returns.
"Demand for carry trades is still high, pushing the yen lower, but on a Friday ahead of a major holiday week in the US, it's not surprising to see many investors simply opting to short the dollar," said Mark Meadows, a market analyst at Tempus Consulting in Washington. US markets will close Wednesday, July 4, to mark Independence Day.
In late afternoon trading, the dollar was down 0.1 percent against the yen at 123.09. Earlier, the dollar climbed as high as 123.56 but it gave up the gains in tandem with a reversal in benchmark US stock indexes. The greenback rose 4.4 percent against the yen in the quarter, its best quarterly performance since March 2005.
The euro vaulted above $1.35 for the first time in three weeks. Earlier in the global session, the Australian, New Zealand and Canadian dollars hit their highest in decades, though loonie eased later in the day.
The euro was up 0.6 percent against the dollar at $1.3534, rounding up a 1.3 percent gain versus the dollar in the quarter. The European currency was up 0.6 percent versus the yen at 166.71 yen. A tame reading on US consumer inflation on Friday also weighed on the dollar, while reports on Midwest manufacturing and consumer sentiment had little impact.
"The cumulative effect of this week's poor US data has weighed against the dollar, including Friday's personal income and spending," said Michael Woolfolk, senior currency strategist at the Bank of New York. The gains in the euro, alongside those in the Australian and New Zealand currencies, compared with weakness in the yen, highlight gaping relative interest rate differentials.
The International Monetary Fund also said Friday the dollar share of total central banks' reserves edged down to its lowest in at least a decade, though overall dollar reserves hit a new record.
The New Zealand dollar was up 0.2 percent at $0.7707, having hit $0.7740, its highest since its 1985 float, and the Australian dollar hit an 18-year high of $0.8521 before paring gains to $0.8476. The aussie was on track for its best quarter against the yen since June 2003, with the New Zealand dollar having its best quarter since December 2001.
The Canadian dollar retreated from a 30-year high against the US dollar after data showed Canada's gross domestic product grew at a slower than expected pace in April. The US dollar was up around 0.4 percent at 1.0636 Canadian dollars, above a 30-year low of 1.0475 hit earlier in the session.