NEW YORK (Reuters) — The dollar dropped to a record low against the euro on Friday after the weakest reading of US economic growth in four years, providing more evidence the economy is falling behind the rest of the world.For the first time since its launch in January 1999, the euro rose above $1.3680 and was on track for the largest monthly increase since November. Against the yen, the euro zone currency climbed to an all-time high above 163 yen, as solid expectations for economic growth in Europe contrasted with weakness in the United States.

Growth in US gross domestic product was below its long-term trend for the fourth consecutive quarter in the first three months of the year, while a measure of inflation posted its largest rise in 16 years.

The data did little to shake the view among investors that the Federal Reserve will likely have to cut interest rates at least once this year, compared with forecasts for higher rates in the euro zone and Britain, among others, thereby reducing the appeal of US fixed-income assets.

"The market has been focused on real yield differentials and not inflation," said Steven Englander, head of G10 currency strategy with Merrill Lynch in New York. "You just can't find evidence that higher inflation expectations are good for the dollar."

The euro climbed to a record high of $1.3683, according to electronic trading platform EBS. By mid-afternoon on Friday, it backtracked slightly to $1.3630, but many analysts and money managers said the falling dollar is part of a long-term trend that is not about to end.

The euro also rose to a record high of 163.25 yen in the wake of the Bank of Japan's decision to keep interest rates on hold at 0.5 percent — the lowest in the developed world — and to cut their outlook on inflation.

The dollar was largely unchanged against the yen at 119.63 yen, while sterling rose 0.3 percent from late Thursday to $1.9963.

One of the biggest movers on the day was the Canadian dollar, which rose to a seven-month high against its US counterpart. The US dollar fell 0.6 percent to C$1.1155 .

The weakening dollar in the face of economic strength in Europe and Asia independent of US demand unearthed the greenback's long-term enemies: diversification of dollar-denominated central bank and portfolio holdings and concerns about financing the US current account deficit.

"The US is still trying to fund a $200 billion-plus quarterly current account deficit but the new twist is that growth has moved to a sub-2 percent pace," said Brian Garvey, senior currency strategist with State Street Global Markets in Boston.

"This could serve as a wake-up call to foreigners who have recently shown an increasing appetite for US equities and US corporate bonds," he said in a note.

US financial markets need to attract $3 billion every working day to cover the outflow of money due to the trade deficit.

Next week, investors will have a steady flow of US economic data to measure the dollar against. In particular, investors will likely focus on the March core PCE price index — the Fed's favoured gauge of inflation — due today and the monthly payrolls report due on Friday.

Significantly lower-than-expected jobs growth could seal the fate of the struggling US dollar.

"The new kid on the block is the potential for a weak labour market," said a money manager with a large currency overlay manager in London. "There's more dollar weakness to go."