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By Bloomberg

The dollar dropped for a second day against the euro after weaker-than-expected U.S. economic data tempered the outlook for higher interest rates as the Federal Reserve begins a two-day policy meeting.

The U.S. currency slid from the highest since at least 2004 versus a basket of major peers as gauges of manufacturing and industrial production fell short of estimates. The Bloomberg ECO U.S. Surprise Index, which measures whether data beat or missed economists’ forecasts, fell to the lowest level since 2009. Even as the dollar fell against most of its 16 major peers, it reached the strongest level against Norway’s krone since 2002.

“You’re not going to see an awful lot of movement before the Fed,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “Tomorrow will give investors confirmation of whether to take more dollar-longs or to take profit on dollar-longs --it’s that simple. I don’t think there are grounds for a reversal of dollar strength.”

A long is a bet an asset will increase in price.

The dollar weakened 0.5 percent to $1.0619 per euro at 6:29 a.m. New York time after reaching $1.0458 on Monday, the strongest level since January 2003. The U.S. currency was little changed at 121.27 yen.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, dropped 0.2 percent to 1,214.49, after falling 0.5 percent on Monday. The gauge reached 1,222.12 on March 13, the highest closing level based on data back to 2004.

Data Disappoints

The dollar has strengthened 14 percent against the euro this quarter, set for the biggest advance since the single currency’s debut in 1999. The greenback had been rising amid speculation the Fed will remove or modify its commitment to being “patient” on the timing of interest-rate increases in its policy statement.

The dollar has slipped versus most of its 16 major counterparts for the past two days as a report on Monday showed industrial production grew less than forecast in February and an index tracking manufacturing in New York state fell a second straight month. Bloomberg’s ECO U.S. Surprise Index slid to minus 0.693 on Monday, the least since March 2009.

The dollar “has gone up such a long way in such a short period of time, investors are probably assessing what has already been priced into the currency in terms of Fed rate hikes,” said Janu Chan, a Sydney-based economist at St. George Bank Ltd. “Ahead of the Fed meeting, you’ll naturally see some cautiousness.”

Three-month implied volatility for the euro against the dollar dropped 29 basis points, or 0.29 percentage point, to 11.36 percent, compared with an average of 7.36 percent during the past year. The measure reached 12.02 percent on March 11, the most since June 2012, based on closing-price data.

Fed Outlook

BNP Paribas SA wrote in a report dated March 17 the dollar is trading in a “more defensive tone” before the Fed meeting.

“We think these latest soft reports will be of limited concern for the Fed,” the analysts wrote in the report. “A bigger source of worry at this week’s FOMC meeting may be the strong appreciation of the USD in recent weeks, and markets are likely wary of any comments in the statement or press conference suggesting USD strength is impeding Fed willingness to hike.”

Norway’s krone declined against all but one of its 16 major counterparts, reaching the weakest level since 2002 against the dollar, as crude oil prices declined and before a central bank meeting on Thursday. Policy makers will cut interest rates to a record 1 percent that day, according to the median estimate of economists in a Bloomberg News survey.

The currency depreciated as much as 0.7 percent to 8.3277 per dollar. It has weakened 28 percent in the past 12 months versus the greenback, the worst performance among major currencies.