Dollar Gains; Investors Bet Recent Declines Too Far

The dollar rallied to one-week highs against the euro, the yen and the Swiss franc Wednesday with investors betting the U.S. currency's recent slump to multiyear lows had gone too far.

The dollar index, which measures the dollar against a basket of currencies, has lost 4.8 percent since the Federal Reserve began cutting interest rates in the current easing cycle in mid-September.

Weak economic data and comments from Federal Reserve Vice Chairman Donald Kohn on credit markets capped gains, though positive sentiment that began with Tuesday's news that the Abu Dhabi Investment Authority was buying a stake in Citigroup remained with the greenback at least for now.

"The (dollar's) move higher was a slight correction, but the focus is now moving back to credit markets," said Ron Simpson, director of currency research at Action Economics.

"Based on the data today, weak durables and housing, and comments from Kohn, the dollar has run its course for now."

Midmorning in New York, the dollar traded 1 percent higher at 109.86 yen , though it had climbed as high as 110.09, a one-week high. The euro fell around 0.5 percent to $1.4749 after earlier trading as low as $1.4710, a one-week low, according to Reuters data.

The dollar rose 1.2 percent against the Swiss franc to 1.1176, earlier hitting a one-week high of 1.1195.

Weak Data

The dollar had earlier surrendered some of the session's gains after a Commerce Department report showed new orders for long-lasting U.S.-made manufactured goods dropped for a third month in a row in October, with companies appearing wary about making new investments.

The dollar also surrendered some gains against the euro after Kohn said he factored some tightening of credit from the financial turmoil into his policy decisions, but recent turbulence may restrict credit more than previously thought.

Several analysts cautioned that Wednesday's dollar strength was likely to be short-lived given the weak tone in U.S. economic data, prospects for further Federal Reserve interest rate cuts and the trickle of bad news from financial companies hit by the credit crunch.

"I wouldn't say this is a significant move at this stage. It is consistent with (euro/dollar) declines we've seen over the last few months -- where those declines have only lasted a few days," said Steve Barrow, currency strategist at Bear Stearns. "I don't think this one will be any different."

The Fed's beige book report -- an anecdotal summary of economic conditions nationwide -- was due later in the session, while Dallas Fed President Richard Fisher was to speak on the regional economy.

The Fed is widely expected to cut interest rates by a quarter percentage point in December to 4.25 percent and again next year to stem the economic fallout from the housing debacle. The reduction in rates has eroded the dollar's yield appeal.

"(The) combination of a broad-based tightening in credit conditions and a worsening in housing downturn ... has pushed the risk of a U.S. recession in 2008 to 40-45 percent," Goldman Sachs wrote in a note to clients.

"(And) therefore we believe that an easier policy reaction will be required to counter the downside risks to growth."

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