U.S. dollar falls as weak data support gradual rate-hike view

By Dion Rabouin

NEW YORK (Reuters) - The dollar fell broadly on Thursday as a plunge in U.S. durable goods orders supported the view of weakening U.S. growth due to softer global demand, which may cause the Federal Reserve to raise interest rates at a slower pace than it had previously signaled.

The much weaker-than-expected reading in durable goods orders, which fell by the most since August 2014, raised the prospects of a lower-than-expected U.S. gross domestic product number on Friday.

A weak U.S. GDP figure, combined with the global equity market volatility that has plagued investors so far in 2016, would greatly reduce the likelihood that the Fed would raise interest rates four times as it had suggested back in December.

Crude oil futures also rebounded on Thursday, rising to their highest in three weeks and boosting oil-linked currencies such as the Australian and Canadian dollars.

The bump in oil as well as the Fed's expected hold on future rate hikes pushed investors into the higher-yielding currencies.

"Markets seem to be grappling with the fact that (the Fed is) not going to be tightening aggressively," said Jonathan Lewis, chief investment officer at Fiera Capital in New York. "If the Fed is most likely to hold off or not tighten aggressively, then we can begin to think about moving from risk-off to risk-on (trading)."

In risk-on trading, investors prefer such currencies as the Aussie, loonie and kiwi, which boast high interest rates but are also largely tied to commodities, making them more prone to large-scale falls in value. The Australian dollar set a three-week high against the U.S. dollar. It was last up 0.8 percent at US$0.7080.

The U.S. dollar fell against the Canadian dollar , dropping below C$1.40 for the first time in three weeks. It was last down 0.35 percent at C$1.4046.

The kiwi rose more than 1 percent against the dollar, last up 0.75 percent to $0.6478.

The expectation of a restrained Fed also boosted European currencies against the dollar, said Eric Viloria, currency strategist at Wells Fargo.

"In some of the more recent data out of the U.S., with the exception of employment, we have seen softening in economic figures," Viloria said.

The euro touched its highest against the dollar since Jan. 20, rising 0.5 percent to $1.0944.

Sterling , also backed by in-line GDP figures showing modest economic growth in Britain, rose 0.9 percent to $1.4355.

The dollar index, which measures the dollar against a basket of currencies, fell to its lowest in two weeks. It was last down 0.35 percent to 98.547.

(This version of the story corrects title and company in 6th paragraph)

(Reporting by Dion Rabouin; Editing by Diane Craft)

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