NEW YORK (Bloomberg) — The dollar dropped against the euro and the yen this week after the US added tariffs on imports from China, fuelling concern the levies will reduce trade flow with the world’s biggest holder of foreign reserves.The US currency also fell against the yen on speculation mounting tension in the Middle East will lead investors to reduce holdings in riskier assets financed by loans in Japan. The tariff and Middle East concern on Friday offset US reports showing signs of a stronger economy and accelerating inflation.

“The whiff of protectionism killed off the bullish sentiment on the dollar,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc.

The dollar fell to $1.3356 per euro, down 0.55 percent from March 23. The US currency touched $1.3401 on the tariff announcement, the lowest level since March 22. The dollar dropped 0.23 percent to 117.85 yen. For the quarter, the dollar lost 1.19 percent against the euro and 1.03 percent versus the yen.

Brazil’s real was the biggest gainer against the dollar among the 16 most active currencies tracked by Bloomberg this quarter, rising 3.72 percent. The South African rand lost the most, dropping 3.67 percent.

The initial duties will range from 10.9 percent to 20.3 percent, Secretary of Commerce Carlos Gutierrez said at a press conference in Washington last week. The Bush administration faced pressure to expand the tariffs from steel companies, textile producers and other manufacturers and their advocates in Congress, analysts said.

China is the second-largest US trading partner behind Canada and holds more than $350 billion of US debt. The overall US trade deficit with China reached $232.5 billion last year, the largest trade gap ever between two countries.

“The measure raises fear that China may retaliate,” said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. “They may not keep buying Treasuries. This will make the US harder to finance its deficits. In the short term people are going to sell the dollar.”

China’s foreign exchange reserve is $1.07 trillion, the largest in the world. China is also the second-largest holder of US Treasury securities, with $353.6 billion, trailing Japan, which has $648.8 billion.

The dollar also weakened on a report denied by a US Navy spokesman in Bahrain yesterday that US investors there were told to leave because of the possibility of a conflict with Iran. A report on the Debkafile Web site, citing “US financial sources,” said investors in Bahrain were told to halt business operation.

Investors reduced their bets on a decline in the yen against the dollar after Iran seized 15 British naval personnel March 23 in the Persian Gulf.

Crude oil prices surged to a six-month high this week on heightening concern the stand-off will threaten oil shipments. Almost a quarter of the world’s oil flows through the Strait of Hormuz, a strategic waterway linking the Persian Gulf with the Gulf of Oman.

“The situation in Middle East could escalate, giving another reason for people to get out of the dollar,” said Robert Houck, chief currency trader in Minneapolis at Wells Fargo Bank. “The overall sentiment is negative against the dollar now.”