Rise in risk appetite, U.S. deficit fear slam dollar

By Steven C. Johnson

NEW YORK (Reuters) - The dollar hit a five-month low against a basket of major currencies on Friday and the euro rose above $1.41 for the first time this year as investors bought higher-yielding currencies and assets on hopes of a global economic recovery.

Sterling approached $1.62, almost an eight-month high, and capped its best month since 1985, while data showing the U.S. economy shrank less than expected in the first quarter lifted global stocks and dulled the dollar's safe-haven allure.

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 2004.

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.

He said dollar weakness was driving up the price of oil, which is priced in dollars, and leading investors to bet that "emerging markets will lead the way to recovery." That lifted commodity currencies at the expense of the dollar and yen.

The euro peaked at $1.4168, its best level since December, and last traded up 1.4 percent at $1.4137. Sterling rose 1.6 percent to $1.6169 after hitting $1.6199, its highest since early October.

The dollar also fell 1.7 percent to 95.25 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 2.1 percent against its Canadian counterpart to C$1.0908.