Dollar sinks on recovery doubts

NEW YORK (CNNMoney.com) -- The dollar continued to slide this week, hovering near monthly lows versus major currencies as worries about an economic slowdown weighed on investors.

As weak U.S. data this week has reinforced the Federal Reserve's bleak stance on the economy, investors are shifting their focus to the long-term economic outlook rather than the daily ups and downs of the stock market.

This uncertainty about whether a recovery is underway has dragged the greenback down to a three-month low versus the euro, a six-month low against the pound and a yearly low versus the yen this week, said Joel Kruger, currency strategist at DailyFX.com.

From a month ago, the greenback is down more than 7% versus the euro, 4% against the pound and nearly 2% versus the yen.

While weak economic data traditionally tends to boost the safe-haven dollar, investors are realizing that the greenback may not be so safe anymore, especially as economic conditions continue to improve abroad, said Kruger.

The European Central Bank released the results of its stress tests of major European banks at the end of last week, which showed that the vast majority would survive a severe economic downturn. The good news continued this week, with figures from the European commission showing improving economic conditions across the euro zone.

Meanwhile, investors in the U.S. digested a slew of disappointing economic reports, including a far worse-than-expected reading on durable goods and the latest snapshot of regional economic conditions from the Federal Reserve, which showed that while the economic recovery is steady, improvements have been"modest."

"People have typically thought, 'even if the data is weak in the U.S., we're going to buy dollars because everything else out there is so dangerous,'" he said. "But now that everything is starting to get better abroad, people are backing out of the dollar altogether, feeling that everywhere else is doing well but the U.S. is still doing badly."

But if the U.S. economy begins showing signs of improvement and the Federal Reserve provides a more optimistic outlook, there is still hope for the beaten-down dollar, he said.

"I think the dollar has a shot, but a certain catalyst needs to happen," he said. "What that catalyst would be remains to be seen, but it could be anything from stronger U.S. data, weakness overseas or the Fed saying the economy is recovering and isn't as bad as previously thought."

"And at some point, markets just get exhausted -- they don't move one way forever, so there is justification for a correction out there somewhere," he added.