The dollar traded close to a six-month high against the euro and rose against the yen on optimism the Federal Reserve's interest-rate cuts this year will bolster the US economy.
Traders bought dollars on speculation the central bank will trim borrowing costs for at least a sixth time in coming months, after Chairman Alan Greenspan said last night that the US still faces several quarters of slow growth.
"Overall, we're bullish on the dollar against the euro and the yen," said Gregory Salvaggio, vice president of trading at Tempus Consulting in Washington. The Fed chairman's remarks indicate "he is still willing to cut rates to stimulate growth in the US." The US currency traded at US$85.90 per euro, from US$85.66 late yesterday, when it rose to US$85.03, its strongest since Nov. 27. The dollar has gained 2.6 percent against the European currency this week. It rose to ?120.70 per dollar from ?119.82 yesterday, though still down 2.3 percent for the week.
The dollar held its gains after a University of Michigan report showed consumers were more confident about their finances and economic prospects in May than in April.
Separate reports showing the US economy grew 1.3 percent in the first-quarter, less than the 2 percent estimated last month, and that orders for durable goods fell in April for the first time in three months, had little effect on the currency, traders said.
The revised gross domestic product estimate "is very much in line with what the market expected," and the dollar isn't likely to fall as a result, said Karl Halligan, chief trader in the New York branch of CIC Bank, France's fifth-largest bank.
The Fed has cut its target lending rate, known as fed funds, five times for a total 250 basis points to 4 percent since January.
Those reductions "should be providing substantial support for a strengthening of economic activity later this year," Greenspan told the Economic Club of New York last night. He also said "further policy response" might be required as the slowdown continues.
"The markets won't get too upset about any weakness in the US, since Greenspan will cut rates again," said John Kyriakopoulos, a currency strategist at JP Morgan Securities Inc in London, referring to the durable goods and revised growth reports.
The European Central Bank has reduced its benchmark rate just once by 25 basis points, to 4.5 percent. The ECB hasn't been able to cut borrowing costs further because of accelerating inflation.
Currencies tend to move according to expectations for economic growth, with higher rates of expansion boosting a currency as investors flock to financial assets.
The effect of reports showing economic weakness in the US is limited by negative sentiment towards the euro and sputtering growth in the euro regions biggest economies, analysts said.
The ECB's policy decisions have played a part in weakening the single currency, said Jim O'Neill, chief currency economist at Goldman Sachs Group Inc in London.
"Their communication is very poor. I don't think they know what they're doing," he said. Goldman Sachs this week lowered its three-month euro forecast to US$0.88 from US$0.98.
The euro is now almost US$0.02 below the level where the ECB bought the currency with other major central banks on Sept. 22 to give it a boost. The ECB subsequently intervened alone on three occasions in November when the euro was between US$0.85 and US$0.87. Each time gains were lost.
"As much as European central bankers would like a stronger euro, the fundamentals just don't point in that direction," said Lee Kassler, chief trader at Israel Discount Bank. ``Once again, everyone has intervention in the back of their minds.''
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