The U.S. dollar fell to five-month lows against a basket of currencies on Friday as an advance in global equities and signs of an easing global recession drove investors to snap up higher-yielding currencies and riskier assets.
Global stocks rose and some equities markets posted 2009 highs, diminishing the safe-haven allure of dollar assets and sending the euro to a 2009 high against the dollar.
A government report showed the U.S. economy contracted in the first quarter slightly less than initially estimated, but the market had expected evidence of a shallower recession.
The dollar is being slapped around, said Boris Schlossberg, director of foreign exchange research at GFT in New York.
Analysts such as Schlossberg noted that as global risk appetite increases, the dollar may start reacting negatively to lackluster domestic economic reports.
The market is now getting realistic about this (U.S.) recovery, he said.
Other reports showed business activity in the U.S. Midwest contracted in May at a sharper rate than expected, while a measure of consumer confidence improved in May.
There will be a recovery, but it will be tepid, Schlossberg added.
In midday trading in New York, the dollar index <.DXY>, a gauge of the U.S. currency's performance against six major currencies, was 1.4 percent lower at 79.400, having earlier hit 79.287, its lowest since mid-December.
It is now down more than 6 percent for the month, on track for its biggest monthly fall since 1985.
The euro was also heading for its largest monthly gain since December and struck its highest level this year against the dollar at $1.4166, according to Reuters data. It was last up 1.4 percent at $1.4121.
The Australian dollar is up more than 10 percent in May, on pace for a record monthly gain. It last traded up 1.6 percent at US$0.7980.
Month-end fixings by corporations and pension funds also pushed the dollar lower, traders said.
We've hit some pretty significant technical levels recently in many currency pairs, which are all adding a bit of selling pressure on the dollar, said Jessica Hoversen, fixed income and currency analyst at MF Global Ltd. in Chicago.
The dollar tumbled last week on concerns U.S. government debt may lose its top triple-A rating as a result of the rising debt levels needed to fix the economy and rehabilitate the financial sector.
Those worries, though still at the back of investors' minds, receded somewhat after Moody's Investors Service affirmed the country's credit rating and the U.S. Treasury was able to sell over $100 billion of government debt.
Now, adding further pressure on the dollar, South Korea's National Pension Service said on Friday it would reduce exposure to U.S. government bonds and equities in its five-year portfolio.
U.S. government bonds account for 83 percent of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.
Money is flowing out of the dollar, said Hoversen at MF Global. There was a lot of institutional money sitting on the sidelines during the worst of the crisis that now is looking for (higher) yields.
The dollar fell 1.4 percent to 95.55 yen, due partly to selling by Japanese exporters but was well above a two-month trough of 93.85 yen marked last week.
The yen was sold against most currencies apart from the dollar, as investors favored the high-yielders.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Kenneth Barry)