By Satomi Noguchi TOKYO (Reuters) - The dollar fell to a one-year low against a basket of currencies on Friday after Chinese data came in stronger than expected and added to economic recovery hopes, prompting investors to keep shifting funds to riskier and growth-linked currencies. The dollar dropped to a seven-month low against the yen and a one-year trough versus the New Zealand dollar. The Australian dollar erased earlier losses and gained versus the greenback after data showed China's industrial output expanded in August at the fastest rate in 12 months, slightly topping forecasts and showing that it was well on the road to recovery. Traders said pressure in the market to sell the U.S. dollar was already strong on improving economic data and company earnings from the United States on Thursday, even before the Chinese data boosted risk-seeking sentiment. "The pressure to sell the dollar is very strong and people are not questioning holding dollar short positions," said a trader for a Japanese trust bank. The dollar index, a gauge of the greenback's performance against six other major currencies, fell as low as 76.625, its lowest since September 2008, before trading at 76.667, down 0.2 percent on the day. The dollar dropped as low as 91.34 yen on trading platform EBS. Traders said dollar buying seen as coming from options desks looking to hedge their books which have exposure to options triggers crowded toward 90.00 yen are slowing the dollar's fall versus the yen. The market showed little reaction to data showing Japan's economy grew a revised 0.6 percent in the three months to June, less than preliminary figures had shown but confirming that the economy has crawled out of recession after a full year of sharp contraction. The euro rose 0.1 percent to $1.4601 after matching its 2009 high of $1.4614 on EBS first struck the previous day. The Aussie rose to the day's highs after the Chinese data, regaining 0.1 percent to $0.8637 and stood a touch closer to a over one-year high of $0.8669 hit earlier this week. The Australian dollar earlier fell against the dollar and the yen as investors booked profits from this week's quick gains in the currency and after weaker-than-expected data on employment and retail sales this week cooled expectations for an interest rate hike as early as next month. But analysts said demand from Asian central banks diversifying their reserves out of the greenback kept providing strong support to the Aussie. "Our trading desk has seen significant flows from central banks buying AUD/USD over the past few days, perhaps in a sign that central banks, particularly those based in Asia, are diversifying their reserve base away from the U.S. dollar," said Riki Polygenis, an economist at ANZ bank in Sydney. The New Zealand dollar climbed to a one-year high of $0.7049 while sterling rose to a one-month high of $1.6707, adding to gains made on Thursday after the Bank of England left monetary policy unchanged as expected, countering speculation of further easing.

Source