The dollar fell to multi-month lows against the euro and high-yielding currencies on Friday on fading expectations for an aggressive rise in U.S. interest rates and renewed concerns about terror attacks on U.S. soil. The U.S. currency also sagged to a one-week low against the yen, erasing gains made on caution over the outcome of upper house elections in Japan on Sunday. "Flows into higher-yielding currencies from the dollar on (last week's) FOMC meeting and weak jobs data took off when the terror alert and other small factors were added," said Masamichi Koike, head of forex spot trading at Sumitomo Mitsui Banking Corp. "That momentum extended into the dollar/yen trade, which was trading independently to the dollar against other currencies."
The latest round of dollar weakness was ignited overseas after U.S. Security Secretary Tom Ridge said that al Qaeda may try to carry out a large-scale attack to disrupt U.S. elections in November. Some analysts said that higher oil prices also had a hand in the dollar's softness. Crude oil futures jumped to more than $40 a barrel -- for the first time in more than a month -- following Ridge's warning, though he offered few details and said he had no plans to raise the terror threat level. "It (euro/dollar strength) is all to do with the terror threat and oil prices," said Jake Moore, forex strategist at Barclays Bank. "There's been a pretty good relationship in the last few months. When there are big moves up in the oil price, euro/dollar tends to rise." The euro rose as high as $1.2421, its highest mark since March 18. It fetched $1.2416/21 as of 0525 GMT. Sterling was at $1.8556/61 , up from $1.8500 in late New York trade, and just shy of a three-month high of $1.8582 hit on Thursday.
The Canadian dollar rose to a fresh three-month high of 1.3138 per U.S. dollar , while the Australian dollar was at 72.35 U.S. cents also near a three-month high. Weekly U.S. jobless claims data released on Thursday showed a total of 310,000 new filings in the week to July 3, down from a revised 349,000 the previous week, but analysts said the improvement was due to seasonal factors and was not significant. The numbers bolstered the case that the Federal Open Market Committee (FOMC) -- which raised interest rates last week for the first time in four years -- may not be as aggressive with future rate increases as previously thought. The dollar has been hampered by the Federal Reserve's insistence on a measured pace of interest rate rises, by weak June payrolls data and a report on Tuesday showing a slower pace of expansion in the U.S. service sector.
JAPAN ELECTION AHEAD
The dollar slipped as far as 107.92 yen , its lowest level since July 1 and down from 109.02 yen late in the New York session. Dealers said the yen may come under pressure again as investor confidence wanes on the possibility of a poor showing for Japan's ruling Liberal Democratic Party in the upcoming elections. A weak showing by the LDP could threaten the rule of Prime Minister Junichiro Koizumi -- a favourite of foreign investors -- or at least diminish his capacity to push through reforms, hurting the yen. "A lot of the bad expectations (for the elections) are in the price now. Now it's just wait and see how the result comes out," said Barclays' Moore. "If they (the LDP) do OK then it doesn't make any difference. But if they do really badly then dollar/yen could rise on Monday." Amid a light calendar for economic data, forex traders showed some interest in trade balance data for Germany and Britain due later in the day. Kansas City Federal Reserve President Thomas Hoenig is due to deliver a speech on "Monetary Policy and the Economic Outlook" at 1700 GMT.///