FOREX-Dollar tumbles as trade war hits U.S. economic data

* Dollar off two-year high after weak capital goods, PMI
data
* Euro bolstered by defeat of euroskeptics in Dutch vote
* GRAPHIC-World FX rates in 2019 http://tmsnrt.rs/2egbfVh

(Updates headline, prices, news; adds analyst quote)
By Kate Duguid
NEW YORK, May 24 (Reuters) - The dollar fell on Friday from
a two-year high against a basket of major currencies after
orders for U.S.-made capital goods fell, further evidence that
manufacturing and the broader economy are slowing, due in part
to the U.S.-China trade dispute.
The weaker-than-expected data, a closely watched proxy for
business spending plans, drove the dollar lower and added to a
fall which began Thursday following a report that showed
manufacturing activity hit its lowest level in almost a decade
in May. Taken together, the reports suggested a sharp slowdown in
U.S. economic growth is under way, which could affect the
dollar's safe-haven status.
The dollar index was down 0.27% .DXY at 97.587. It was
also 0.80% off a two-year high of 98.371 hit in the previous
session.
Some analysts initially believed that a trade war would be a
boon for the U.S. dollar - both because the currency serves as a
safe haven in times of uncertainty and because the United States
was likely to be hurt the least, but that has not proven to be
true.
"The IMF suggests that U.S. import tariffs are mainly paid
for by U.S. companies, depressing their profit margins. Hence,
it should not be surprising to see U.S. capex plans being cut
radically, which should soon translate into moderating labor
market conditions," wrote Hans Redeker, global head of foreign
exchange strategy at Morgan Stanley.
China on Friday denounced U.S. Secretary of State Mike
Pompeo for fabricating rumors after he said the chief executive
of China's Huawei Technologies Co Ltd HWT.UL was lying about
his company's ties to the Beijing government. Escalating trade tensions and weak data have fueled rate cut
expectations by the U.S. Federal Reserve. Money markets now
broadly expect one rate cut by October followed by another by
January 2020.
"In the current circumstances, we strongly suspect that
further escalation in protectionism will lead the Fed to
consider easing policy," wrote Michael Hanson, head of global
macro strategy at TD Securities. "Increases in inflation should
be relatively short-lived, while the hit to growth could be more
persistent."
Dollar weakness also helped boost sterling GBP= from a
4-1/2-month low, though the rally was primarily driven by UK
Prime Minister Theresa May's announcement on Friday that she
would quit after failing to deliver a Brexit deal.
The move sets up a contest that will bring a new prime
minister to power who could pursue a cleaner break with the
European Union. The pound was last up 0.5% at $1.272. GBP/
The euro was also stronger on Friday, up 0.24% to $1.121,
benefiting from the dollar's weakness and from the Dutch part of
the EU parliamentary elections. An exit poll showed the Labour
party of European Commissioner Frans Timmermans won a surprise
victory over a euroskeptic challenger who had been topping
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GRAPHIC-World FX rates in 2019: http://tmsnrt.rs/2egbfVh
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