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US dollar advances against yen, euro

The US dollar rose to a fresh two-month high against the yen and also advanced versus the euro in choppy trading on Friday that brought the US currency at some points near its best levels of the week and at others to its worst.

Trading was driven by a number of things, including quarter-end positioning by money managers, a jump in US Treasury yields, technical factors and profit-taking after the dollar rose to multi-month highs this week but failed to break significantly higher from there.

Additionally, the dollar was getting support from a softness in oil prices and a rise in Treasury yields that put the yield on the two-year note at its highest level in more than four years, topping out at 4.19 percent. The 10-year note yield rose to its highest level since early August, touching 4.34 percent.

Late afternoon, the euro was at US$1.2022 versus US$1.2040 late Thursday, according to EBS.

The US dollar was at ?113.50, up from ?112.98, and at 1.2941 Swiss francs from SF1.2930. The pound was up at US$1.7633 from US$1.7618, while the euro was at ?136.45 from ?136.05.

The dollar has been well supported in recent weeks as damage from Hurricanes Katrina and Rita didn't live up to the most pessimistic expectations and as Federal Reserve policymakers have indicated they will continue to raise interest rates.

This week, the US currency extended those gains somewhat, but traded in a fairly narrow range, with the euro trading in a band only slightly larger than US$0.01.

The dollar didn't get any sustained direction from US economic data on Friday that showed weaker-than-expected US income and spending for August, an uptick in a key inflation measure, better-than-expected Chicago-region manufacturing and a drop in September consumer sentiment.

Overnight, the dollar had traded higher versus the euro, on continued optimism over prospects for higher US interest rates following hawkish comments Thursday from Federal Reserve Bank of Philadelphia President Anthony Santomero.

But buyers stepped in again each time the euro pushed below US$1.2000, rejecting a key technical level that has become an increasingly stubborn barrier this week.

Some investors suggest that the repeated failure to push the euro below US$1.20 is a sign that the dollar rally of recent weeks might have run its course.

Others are saying that traders are merely consolidating their dollar holdings ahead of the next advance for the US currency.

The US reported that personal income decreased at a seasonally adjusted monthly rate of 0.1 percent in August, after climbing an unrevised 0.3 percent in July.

August personal consumption dropped by 0.5 percent, after a revised 1.2 percent increase the month before.

Both figures fell well below the 0.4 percent increase expected for income, and the 0.2 percent drop expected for spending.

But a key inflation measure showed an uptick in prices. Year over year, the price index for personal consumption expenditures minus food and energy advanced 2.0 percent compared to August last year. The year-over-year climb in July was 1.9 percent.

The Federal Reserve watches the PCE price index closely in its vigilance against inflation. The central bank's so-called comfort zone for the gauge ranges from 1.0 percent to 2.0 percent.

David Durrant, chief strategist for fixed income at Julius Baer Investment Management in New York, said "data such as this is almost unbiased."

"It's not enough to push the dollar stronger probably, partly because of where the dollar is -- at the top of its range," but the inflation number means the weak spending and income numbers lend the euro no support, he said.
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