The dollar fell on Friday to its lowest in five months against a basket of currencies on concern about the triple-A ratings status of the United States after Britain's outlook was downgraded the previous day.
The dollar's weak technical position deteriorated further as the euro rose to within sight of $1.40 and sterling clawed back all the ground against the dollar and euro lost in the wake of Standard & Poor's move on Thursday.
S&P said it could downgrade Britain's triple-A credit rating, a move that initially hit the pound but then sparked broad selling of U.S. stocks and bonds on fears that record U.S. deficits could lead to the same warning.
After hitting five-month lows in the past three days, the dollar index looks to be heading for its biggest weekly fall since the Federal Reserve launched its large-scale purchases of U.S. Treasuries in late March.
"The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating after S&P lowered the outlook to negative from stable for the UK," said Roberto Mialich, FX strategist at Unicredit in Milan.
By 5:19 a.m. EDT, the dollar index .DXY, a gauge of its value against six major currencies, was down 0.2 percent on the day at 80.262, having earlier hit a fresh 2009 low of 80.153.
The dollar index is down more than 5 percent so far in May, shaping for one of its steepest monthly declines over the last quarter of a century.
The euro was up 0.4 percent at $1.3956. Earlier in the day it hit a five-month high of $1.3978, right at long-term technical resistance at the 55-week moving average of $1.3974.
Sterling was flat at $1.5842, after rising as high as $1.5898, its strongest since early November. Cable is up 4 percent on the week, as traders have come to think Britain is only one of many nations facing deep fiscal problems.
Data on Friday showed the UK economy shrank an unrevised 1.9 percent on the quarter for the first three months of the year.
TREASURY TEST NEXT WEEK
Moody's Investors Service on Thursday said it is comfortable with its triple-A sovereign rating on the United States, but the rating was not guaranteed forever.
A big test of investor appetite for dollars and dollar-denominated assets will come next week when the U.S. Treasury auctions $101 billion of two-, five- and seven-year paper.
The dollar's broad slide took it to a two-month low against the yen after Japanese Finance Minister Kaoru Yosano said on Friday the country is not thinking about intervention in the currency market.
The yen got a further boost after Bank of Japan Governor Masaaki Shirakawa said Japan's economy is no longer in free-fall and he expects the economy to improve sharply in the second quarter, although uncertainties remain.
