By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The dollar tumbled from a seven-month high on Thursday, as risk appetite took a turn for the worse after soft Chinese trade data spooked a market that is expecting an interest rate increase from the Federal Reserve by the end of the year.
The dollar index posted its largest daily percentage loss in a month.
The U.S. currency also fell from a more than two-month high against the yen and Swiss franc, two safe-haven currencies that benefit in times of political or financial stress.
"A significant slowdown in Chinese growth could once again foil the plans of U.S. authorities to stabilize monetary policy," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"Still it may be premature to consider such a possibility, but today's news certainly sets the stage for a deeper correction in the dollar," Schlossberg added.
Exports from China, the world's second largest economy, fell 5.6 percent in yuan terms in September from a year earlier and 10 percent in dollars.
The dollar has gained more than two percent so far this month against a basket of currencies, boosted by U.S. rate hike expectations. Investors have priced in a roughly 70 percent chance the Fed would nudge rates higher at its December policy meeting, a prospect reinforced by Wednesday's release of the last Fed monetary policy meeting minutes.
Minutes of the Fed's September meeting showed that the Federal Open Market Committee was deeply divided over the timing of the next interest rate hike, as several members agreed the Fed should raise rates in the near term if U.S. data continued to strengthen.
That said, Christopher Vecchio, currency analyst at DailyFX.com in New York pointed out the Fed "maybe sounding hawkish on the front end, but increasingly dovish on the long end."
Vecchio believes U.S. productivity growth remains low and "with material labor market slack remaining, the U.S. may be stuck in a period of lower growth." That should cap the dollar's upside in the medium to long term.
In late trading, the dollar index fell 0.4 percent to 97.538 <.DXY>, after notching a seven-month peak earlier in the session.
The dollar was last down 0.5 percent against the yen at 103.61 yen <JPY=>, after hitting its strongest level since late July.
The U.S. currency also fell from 2-1/2 month peaks versus the Swiss franc and last changed hands at 0.9863 franc, down 0.4 percent.
The euro fell briefly below $1.10 for the first time since July, but quickly recovered to trade 0.4 percent higher on the day at $1.1052 <EUR=>.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Frances Kerry and Diane Craft)