The dollar gave up more ground Friday, undermined by cool inflation data and weakness on Wall Street as the market digests news of Bear Stearns Cos.' bailout.

Data showed U.S. consumer inflation moderated in February, opening the door for the Federal Reserve to keep cutting interest rates at its meeting next week to support flagging economic growth. Lower interest rates usually depress a currency because they erode the returns on assets denominated in it.

The consumer price index was flat in February, the Labor Department said Friday. Wall Street economists had expected a 0.2% increase.

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"The Fed dodged the proverbial bullet today, with a free hand to cut 75 basis points next week and an open door to further cuts in the second quarter," wrote Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

U.S. stocks on Friday shed opening gains as the Bear Stearns news offset the cheer that initially came with inflation data.

Bear Stearns (BSC) said its liquidity had "significantly deteriorated" during the past 24 hours, and J.P. Morgan Chase (JPM) said it worked with the Federal Reserve Bank of New York in securing funding to the brokerage firm.

The dollar index was at 71.742, down from 72.047 in London earlier Friday.

The euro was trading at $1.5649, up from $1.5566 in London earlier. The European unit rose as high as $1.5686, a new record high.

The British pound sterling was at $2.0372, up from $2.0292 in London earlier.

The dollar bought 110.06 yen, down from 100.54 yen in London.

The dollar bought 1.0041 Swiss francs, after earlier dropping below parity with that unit to 0.9986.

'Dangerous vicious cycles'

Stephen Jen, currency strategist at Morgan Stanley, warned in a research note that traders should remain short the dollar but also remain aware of the potential for eventual intervention. He argued, however, that "preconditions" for a coordinated strike have yet to be met.

With the falling dollar "fueling dangerous vicious circles through commodity prices and eroding confidence, it is prudent to remain on an intervention watch, monitoring closely whether the preconditions for interventions are met," Jen said.

For now, diverging monetary-policy paths and a lack of "re-coupling" between the world and U.S. economies are among a list of obstacles that may make the Group of Seven nations reluctant to take any coordinated action just yet, he said.

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