American funds and banks sold dollars heavily, sending the currency sharply lower in a market where trading was light in advance of the holiday weekend. ''There was a lot of speculative trading,'' said Mark Cliffe of HSBC Markets. ''People seized on the figures as an excuse to drive the dollar lower.''
The series of economic statistics showing the recovery is tailing off has tilted the financial markets towards a consensus that Alan Greenspan, Federal Reserve chairman, will make the next move in US interest rates down rather than up. Yesterday's figures sent bond prices up again at the same time as hitting the dollar and share prices.
Malcolm Barr, currency analyst at Chemical Bank, said: ''Data is making the markets talk about the Fed cutting interest rates. That's probably overstating the case, but traders are looking for the next story.''
The economic slowdown could fan trade tensions with Japan, analysts said. Recent figures showed a fall in industrial output last month, dominated by cutbacks in car production, and a rise in the US trade deficit with Japan during the first quarter due to higher vehicle and auto parts imports.
Mr Cliffe said: ''The auto sector is at the leading edge of the slowdown.'' The trade row is adding to investors' nerves about the US currency.
Yesterday's figures showed a rise in claims for unemployment benefit last week, and an increase in the average number of claims in the past four weeks. At 371,500, this rolling average was the highest since late 1992. Only six states out of the 50 reported a fall in the number of jobless.
The number of sales of existing (rather than new) homes dropped to 3.39m in April from 3.62m in March, according to the National Association of Realtors.
Edmund Woods, NAR president, blamed consumer unease due to the weaker economy and jobs market. A decline in mortgage rates of nearly half a percentage point since February has not yet helped to stimulate the housing market.
Cheryl Katz, an economist at investment bank Merrill Lynch in New York, agreed. ''People are concerned about making major purchases. People are nervous about their job situations,'' she said.
Many Wall Street analysts believe the current gloom about the economy is exaggerated. According to this school of thought, growth has slowed so sharply because earlier over-production led to a build-up of stocks which is now being run down. If so, growth will revert to normal later in the year.
John Tuccillo, chief economist at the NAR, predicted the economy would settle into a pattern of slow and steady growth. This would calm consumer fears and revive home sales in the next few months.
However, the gloom won out in the markets yesterday. Chris Iggo at Chase Manhattan said: ''The recent statistics have been so weak that there is even talk of a fall in GDP in the second quarter. This is what is hitting the dollar.''
By the close in New York, the greenback had fallen more than four pfennigs against the mark, to DM 1.3980, and by two yen to Y84.75. Market rumours about a possible Mexican default added to the pressure on the US currency. The yield on 30 year Treasury bonds fell to 6.72 per cent. The Dow Jones index was 25 points lower by the close.