The dollar hit a five-month low against major currencies on Friday and the euro rose above $1.41 for the first time this year as hope of a global recovery drove investors to buy higher-yielding currencies and assets.
Sterling approached an eight-month peak near $1.62 and headed for its best month against the dollar since March 1985, while global stocks rose and some equities markets posted 2009 highs.
Concern about the expanding amount of debt needed to fund a record $1.8 trillion U.S. budget deficit added to dollar woes this week and put the benchmark 10-year Treasury yield en route to its biggest two-month spike since 2003.
Those worries amplified a report that South Korea's National Pension Service intends to reduce exposure to U.S. government bonds and equities in its five-year portfolio.
There's a visceral concern about the debasement of the U.S. currency because the United States has a lot of debt to finance and may have to print more money to do it, said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
Also, he said dollar weakness was driving up the price of oil, which is priced in dollars, and leading investors to bet emerging markets will lead the way to recovery.
That lifted commodity-linked and dulled the safe-haven allure of U.S. dollar assets.
The euro was last up 1.3 percent at $1.4122, its best level since December, while sterling rose 1.4 percent to $1.6145. Earlier, it hit $1.6199, its highest level since early October.
The dollar also fell 1.6 percent to 95.40 yen while the Australian dollar rose above $0.8000 for the first time since September, leaving it on pace for a record monthly gain of more than 10 percent. The dollar fell 2 percent against its Canadian counterpart to C$1.0920.
An index that measures the dollar against six major currencies <.DXY> fell 1.4 percent and was on track for its worst month since March 1985.
HUNTING FOR YIELD
A government report showing the U.S. economy contracted slightly less than initially estimated in the first quarter also encouraged investors to take on more risk.
Money is flowing out of the dollar, said Jessica Hoversen, fixed income and currency strategist 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.
Another report showed business activity in the U.S. Midwest contracted in May at a sharper rate than expected, though a measure of consumer confidence improved.
In recent months, the dollar gained when economic news was bad because investors bought it as a safe haven, but some analysts said deficit-related worries have helped weaken that relationship.
Boris Schlossberg, director of FX research at GFT Forex, said that as global risk appetite increases, the dollar may start selling off on lackluster domestic economic reports.
Bond yields retreated on Friday, though they are still up sharply since mid-March, when the Federal Reserve announced plans to buy longer-dated Treasuries to keep rates low.
Investors also came out in fairly large numbers this week to buy $101 billion of new U.S. government debt, suggesting dollar woes are also tied to a general search for higher-yielding, higher-risk assets abroad.
(Additional reporting by Vivianne Rodrigues; Editing by Diane Craft)