Sun, Sep 18, 2005 - Page 10 News List

US dollar trades higher on inflows data; euro rises

CLIMBING UP The greenback drifted up as data showed capital was streaming in to the US in amounts sufficient to fund the massive deficit


The US dollar traded mostly higher Friday after data showed US capital inflows remained sufficient to finance the country's deficits, but the euro drifted up in positioning ahead of German elections.

The European single currency drifted up to US$1.2235 at 9pm GMT, compared with US$1.2221 late Thursday in New York.

The US dollar firmed to ¥111.34 from ¥110.64 on Thursday.

Figures from the US Treasury Department put capital inflows into the US during July at US$87.4 billion, well ahead of expectations of US$60 billion.

There was also a sizeable upward revision to July's inflows.

"The overall message is that funding for the US current account deficit remains ample for now," said Daragh Maher, senior FX strategist at CALYON.

The capital flows report offset a disappointing report on the US current account deficit, which dipped slightly in the second quarter to US$195.7 billion, but was higher than forecasts of US$193 billion, and the second highest on record.

The market also tried to guess the next move by the US central bank on interest rates, with most analysts seeing a rate hike.

The US Federal Reserve has raised interest rates 10 times since June last year to 3.50 percent, and until Hurricane Katrina struck late last month, was widely expected to raise its rate target again this month, in November and possibly in December as well.

"While a considerable amount of uncertainty surrounding monetary policy still remains, we continue to expect that the Federal Reserve will respond to still solid growth," said Gregor Bush at Bank of Montreal.

"This will keep the central bank removing monetary stimulus at a measured pace raising the fed funds rate to 3.75 percent at the September 20 meeting, to 4.00 percent by years end and, ultimately, to 4.50 percent by the fall of 2006."

Meanwhile, investors treaded carefully in the run-up to the weekend German general election, with opinion polls showing Chancellor Gerhard Schroeder's Social Democrats closing the gap on the Christian Democrats, led by Angela Merkel.

Investment had begun to flow into Germany on expectation that the Christian Democrats would win back power and embark on wide-ranging economic reforms.

Analysts said those inflows may slow down, or possibly go into reverse, should the outcome of the election be unclear.

"It looks as if there are more negative possibilities for the euro than positive outcomes and hence we'd not want to go into the election long of the euro," said Steve Barrow, currency strategist with Bear Stearns.

In late New York trade, the dollar edged up to 1.2691 Swiss francs from 1.2674 Thursday.

The pound was changing hands at US$1.8079 after US$1.8057 late Thursday.

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