NEW YORK (Reuters) - The dollar fell on Friday to three-month lows against a basket of currencies on bets the Federal Reserve would start lowering interest rates, while the yen rose to a five-month high versus the dollar on growing tensions between Iran and the United States.
The greenback's weakness propelled the euro to three-month highs. The single currency was also buoyed by stronger-than-forecast survey data on French and German business activity.
The dollar extended its losses for three straight sessions since the Federal Reserve on Wednesday signalled it was prepared to lower interest rates later this year.
The Fed and the European Central Bank this week hinted they were open to ease policies to counter a global economic slowdown, exacerbated by global trade tensions.
"Now it's going to be a horse-race between the Fed and ECB on policy easing," said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments in Minneapolis.
The focus now shifts to whether Washington and Beijing can resolve their trade dispute at a summit in Japan next week of leaders from the Group of 20 leading world economies.
U.S. President Donald Trump and Chinese President Xi Jinping are due to meet at the G20 next weekend, but analysts say chances of a decisive breakthrough are low.
The greenback was 0.67% lower at $1.1368 per euro after touching $1.1334, the lowest since March 22.
Against a basket of currencies, the dollar was 0.42% lower at 96.219 after hitting 96.204, the lowest since March 21.
The dollar enjoyed a brief respite on news of stronger-than-forecast sales in U.S. existing homes in May.
The encouraging news offset IHS Markit data that showed manufacturing growth weakened to its most sluggish level since September 2009 in June, while services sector activity slumped to its lowest level since February 2016.
Friday's U.S. data did not change traders expectations the Fed would lower key lending rates, as early as July. They priced in the probability policy-makers will have reduced rates by at least 75 basis points by year-end, based on calculations by CME Group's FedWatch tool on its interest rates futures.
GRAPHIC: Bets on bold first rate-cut from the Fed - https://tmsnrt.rs/2XTkkpn
U.S.-IRAN TENSIONS
Meanwhile, Iran's downing of an unmanned U.S. surveillance drone stoked fears about a military conflict between the two nations following a spate of attacks on oil tankers in the Gulf region.
An initial wave of safe-haven buying of the yen faded following news that Trump shelved a missile strike against Iran and preferred dialogue with Tehran, especially over its nuclear program.
"The Iranians for their part refused the overture for now, so tensions remain high, but the risk of conflict appears to have eased," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The yen moved to 107.045 per dollar during Asian trading, which was its strongest level since Jan. 3. It was last down 0.08% at 107.4 yen per dollar.
Graphic: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh
(Additional reporting by Tommy Wilkes in London; Editing by Gareth Jones, Alistair Bell and Tom Brown)
