The rebound in the dollar accelerated across the board on Friday on data showing strong foreign demand for US assets, with the euro finishing the week about IS$0.05 below its all-time high set last Monday around US$1.29.
The US Treasury Department released figures showing that foreigners stepped up their net purchases of US securities to US$87.6 billion in November from US$27.8 billion the month before.
Investors had become increasingly concerned about the ability of the US to attract enough investment flows to fund the massive current account deficit following a paltry US$4.2 billion net inflow in September -- a five-year low.
The report is "overwhelmingly positive" for the dollar because it "shows that the decline in US interest rates to 45-years lows has not undermined foreign appetite for US securities to the degree thought earlier," Michael Woolfolk, senior currency strategist at Bank of New York, said in a research note.
Perhaps more significantly for the dollar, private investors accounted for a hefty US$61.6 billion of the inflows, indicating that intervention by Asian central banks hasn't been the only source of support for the US currency.
On Friday, traders said the Bank of Japan, which intervenes on behalf of Japan's Finance Ministry, was in the market buying dollars as the US currency fell to a fresh three-year low around ¥105.75.
However, the official bids only provided short-lived support, and the dollar fell back below ¥106 until the Treasury data triggered a short-covering rally that pushed the dollar to around ¥107 by midday.
Friday afternoon, the dollar was trading around ¥106.79, up from ¥106.40 late Thursday in New York. The euro was at US$1.2369, well below US$1.2570 Thursday, and had fallen to ¥132.13 from ¥133.75. Against the Swiss franc, the dollar rose to 1.2673 from 1.2460, while the British pound fell to US$1.7969 from US$1.8230.
The dollar's broad-based rally broke down all kinds of technical support levels, with weekly reversal patterns in the dollar's value against the euro, Swiss franc, Canadian dollar -- as well as in the price of gold -- suggesting further short-term dollar strength, said Jordan Kotick, technical market strategist at J.P. Morgan.
"What we're seeing in the first part of January is a blueprint for the rest of 2004," said Kotick, who predicted more two-way flows and significant strength in the dollar during the first quarter before the currency resumes its long-term downtrend.
The dollar also got a boost from the University of Michigan's mid-month report on consumer sentiment for January, which was said to have shown an increase to 103.2 from 92.6 last month, according to people in the market who have seen the report.
Among other data released in the morning session, US industrial output rose a smaller-than-expected 0.1 percent last month following November's 1 percent surge, while capacity use was steady at 75.8 percent. Business inventories rose 0.3 percent in November, following a 0.4 percent increase the month before.
The market largely ignored US Treasury Secretary John Snow's comments last Monday on the dollar. Snow reaffirmed the administration's support for a strong dollar, while also stating that currency levels should be set by markets.
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