NEW YORK, Jan 18: The dollar fell on Friday after spate of poor US economic data gave traders, already biased against the dollar on fears about possible war in Iraq, another reason to sell the currency.

The dollar, which has been falling virtually without interruption since early December on war worries, extended its losses to touch a new three-year low against the euro and a fresh four-month low versus the yen on the surprisingly poor US economic data.

The first surprise came from trade data, which showed the nation’s trade gap widening to a record $40.1 billion in December.

A wider trade gap not only subtracts from gross domestic product, but also pressures the dollar by boosting the amount of capital inflows required to fund a growing current account deficit.

The dollar took another hit when the government reported that industrial production fell 0.2 per cent in December while capacity utilization fell to 75.4 per cent from 75.6 per cent the prior month. Economists had expected output to rise.

Capping off the day’s bad data was the University of Michigan’s preliminary consumer sentiment survey for January. The index, which was forecast to stay flat from 86.7 in December, instead fell to 83.7. Adding to the gloom, the expectations portion of the index fell sharply.

The dollar fell as far as $1.6079 per euro, a new three-year low, and was trading close to that at $1.0665 in late afternoon in New York, a loss of roughly 0.4 per cent in the session.

The dollar slipped by a similar margin against the Swiss franc to 1.3687 francs, having earlier set a new four-year low at 1.3667 francs.

Against the yen, the dollar was off 0.13 per cent at 117.70 yen but above the day’s lows of 117.43 yen. Once again, the threat of intervention by the Bank of Japan lent the dollar some support.

For the week, the dollar lost almost 0.9 per cent versus the euro and 1.2 per cent against the yen.

While the poor US data helped push the dollar to new lows on Friday, dealers said the ultimate driver behind the currency’s declines have been, and would remain, concerns about a possible military conflict in Iraq.

Jitters about the situation in Iraq reached a peak on Thursday when UN weapons inspectors announced they had discovered empty chemical warheads in Iraq.

As we get close to the end of January, the focus is going to be totally on Iraq. You can see it across all the markets, gold, oil and Treasuries, said Mellon Bank’s Wilson.

Chief weapons inspector Hans Blix is scheduled to give a report to the United Nations on the group’s findings on January 27. In a German newspaper article published on Friday, US Secretary of State Colin Powell was quoted as saying there would be a “persuasive case” by the end of January that Iraq was not cooperating with weapons inspectors.

While most dealers and analysts believe the dollar could experience a sharp upward spike once the situation in Iraq becomes more clear — whether because a war had started or because the crisis had been otherwise defused — they said it was difficult to position in that direction.

Most US financial markets will be closed on Monday for the Martin Luther King, Jr. holiday, though there will be foreign exchange trading.

There is some speculation that the Bank of Japan could take advantage of thin markets on Monday to intervene against the yen.

The rest of the week offers little in the way of economic data, though traders will look to the latest business survey from Germany’s ZEW Institute and to British retail sales and fourth-quarter 2002 growth data.

The Bank of Canada meets on Tuesday. Economists do not expect a rate change.—Reuters