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Dollar firms on US' surprising shrinking deficit

The US dollar firmed against the other major currencies on Friday as US trade data showed a surprisingly shrinking deficit that reinforced the notion of stronger growth that could mean higher interest rates.

At 9pm GMT, the euro was trading at US$1.3369, from US$1.3429 on Thursday, and at one point fell to US$1.3321 -- the lowest point since April 4.

The greenback lost ground against the New Taiwan dollar on the Taipei Foreign Exchange on Friday, falling NT$0.042 to close at NT$32.990.

A total of US$1.024 billion changed hands during the day's trading.

The US currency opened lower at NT$32.982 and fluctuated between NT$32.950 and NT$33.052.

The yen lost ground against the US dollar on Friday as Japan said that machinery orders, a key gauge of corporate spending, rose for the first time in three months in April but much slower than expected.

The US dollar rose to ?121.74, from ?120.91 late on Thursday.

Analysts said the upheaval in world financial markets, including big drops in many stock markets, prompted some investors to reassess their outlook.

"The dollar's strength seemed to originate more from a global swell of risk aversion," John Kicklighter at Forex Capital Markets said.

Others noted the jump in US bond yields reinforced the perception of stronger US economic growth and possibly a hike in interest rates by the US Federal Reserve.

"Despite aggressive selling of both US bonds and equities, the dollar has moved higher, as the prospect of higher domestic interest rates offsets the weaker asset market backdrop, for now," Calyon analyst Daragh Maher said.

Although the US Federal Reserve has so far kept US interest rates unchanged for a year at 5.25 percent, the central bank has warned that it stands ready to raise rates if inflation pressures mount.

Interest rates are creeping higher, particularly in the eurozone, where the European Central Bank (ECB) lifted borrowing costs this week a quarter point to 4 percent.

"Investors are starting to entertain the idea of higher US rates," Commerzbank analyst Gavin Friend said.

However, he added: "Our in-house view is the Fed will still cut rates at the end of this year, while the ECB and others will continue to hike."

In economic news, the US trade deficit dropped 6.2 percent to US$58.5 billion in April as Americans slashed spending on imports, including oil, the US Commerce Department said.

It was the steepest decline since October and confounded analysts' consensus forecast of an increase to US$63.5 billion.

The data suggested stronger US growth as exports pick up.

The euro's weakness, particularly against the dollar, was exacerbated on Friday by weak German industrial production data, which showed a 2.3 percent fall in output in April from March, far below the 0.5 percent increase expected by markets.

In late New York trading, the US dollar stood at 1.2352 Swiss francs from SF1.2238 late on Thursday.

The pound was being traded at US$1.9698 after US$1.9777.
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