NEW YORK, Jan 18 (Reuters) – The dollar climbed on Tuesday after data showed investments coming into the United States were more than enough to cover the country’s huge trade deficit on a monthly basis.
“The U.S. dollar has rallied strongly on the news and the data cools fears that these flows would not be able to overcome the monthly U.S. trade deficit,” said Andrew Busch, global currency strategist at BMO Nesbitt Burns in Chicago.
“This should add some momentum to the dollar’s rally and certainly is the mental panacea for that $60 billion dollar (trade deficit) number from last week,” he added.
By midday in New York, the euro had fallen to $1.3039, down about 0.2 percent from late Monday. Earlier, the euro zone currency had dropped to two-month lows at $1.2996 in Europe as investors focused on rising U.S. interest rates.
Higher interest rates tend to support a currency by making returns on deposits more attractive to global investors.
The dollar was up 0.36 percent against the yen at 102.42 yen, recovering from Monday’s five-year lows.
Against the Swiss franc, the dollar rose to 1.1843 francs. Sterling, meanwhile, held gains to $1.8684.
Net flows of capital into U.S. assets surged to $81 billion in November from a revised $48.3 billion in October and were far above market expectations of around $55 billion.
November’s inflows more than adequately covered the trade deficit of around $60.3 billion for the month.
Following the U.S. data, some analysts have started cautiously entertaining thoughts that the dollar’s rally in the past few sessions could be more than just a fluke.
“There’s a chance the euro has seen its high for the cycle and Asian currencies have further to adjust,” said Bob Sinche, head of global currency strategy at Bank of America in New York.
The U.S. flows data “continue to show that U.S. assets have appeal and that the scare stories about the twin (budget and trade) deficits aren’t really valid,” he added.
Michael Woolfolk, senior currency strategist at Bank of New York, reckoned however that much of November’s asset inflow was speculative, given an increase in investments from Caribbean money center banks.
These banks are known to be financing channels for most hedge funds, which have become major players in the daily $1.3 trillion turnover of the global foreign exchange market.
The dollar showed little reaction to comments by Philadelphia Federal Reserve Bank President Anthony Santomero saying the central bank should continue raising U.S. interest rates at a measured pace, as the economy has embarked on a period of sustained expansion.
He also said that a declining dollar and reasonable growth in the economies of the United States’ trading partners should help stabilize the U.S. current account deficit in 2005.
Minneapolis Federal Reserve Bank President Gary Stern echoed Santomero sentiments on trade but was more dovish on the U.S. inflation outlook. Stern told a financial planners association meeting that U.S. core inflation remained subdued in 2004, likely rising to roughly a 1.5 percent annual rate.
His comments, however, had marginal impact on the dollar.
Many in the market said near-term currency movements would be driven by competing factors: U.S. interest rate speculation and European insistence that Asian currencies should relieve some of the pressure on the euro occasioned by a weak dollar.
Asian currencies have outperformed recently on speculation next month’s meeting of the Group of Seven rich nations will put more pressure on Asian countries to free up their currency regimes. But investors were keen to cover short dollar/yen positions on Tuesday. (Additional reporting by John Parry)
Source: Reuters via Yahoo News Asia