Dollar Rises on Month-End Corporate Buying
The dollar surged against a basket of major currencies Friday and was on track for its biggest weekly gain in more than a year on profit-taking in the euro and month-end squaring up of positions by corporates.
The greenback was also supported by optimism that further Federal Reserve interest rate cuts would help the world's biggest economy avoid a recession.
The dollar index, which measures the greenback against six major currencies, rose 0.5 percent to 75.952. On the week, it was up about 1.2 percent, on track for its best weekly gain since at least September 2006.
"What we are seeing today is end of month and towards the end of the year profit-taking and squaring up of positions.
That should lead the dollar to strengthen a little bit," said Mark Meadows, a currency strategist at Tempus Consulting in Washington.
"All the bad news for the dollar is factored in already. It's likely that from here until the end of the year the dollar may see bit of a reprieve," he said, adding that the euro could slip to $1.45 by year end.
In New York afternoon trade, the euro was quoted at $1.4677, down 0.4 percent on the day and its lowest level in just more than a week. It earlier scaled a session peak of $1.4784 in overseas trade.
The dollar also got a lift from a magazine report that Bahrain would maintain the dinar's peg to the greenback as OPEC prepares to meet next week amid growing pressure on some Gulf states to depeg their currencies of the sluggish dollar.
Fed Chairman Ben Bernanke's hint late on Thursday that the central bank might cut rates to help the economy weather a resurgence of financial market turmoil, also boosted global stock markets and added to the dollar's advance.
Lower U.S. interest rates usually weigh on the dollar becase they reduce the yield on dollar-denominated assets, but this time analysts said the market was taking a longer view.
"It's the perception that the Fed will do what it has to do to keep the U.S. from falling into recession," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
"I think it's too soon to declare victory, but markets are looking past the near-term housing market negatives, and the rate story has lost some of its negative impact," he added.
The more optimistic market mood has also triggered a move back into risky carry trades that use cheaply borrowed yen to finance purchases of higher-yield currencies and assets.
That pushed the dollar up 0.9 percent to 110.86 yen, well off a 2-1/2-year low of 107.20 yen hit on Monday, according to Reuters data.
The euro was up 0.5 percent at 162.75 yen.
The dollar gained 0.8 percent against the low-yielding Swiss franc, to trade at 1.1274 francs.
In remarks to the Charlotte Chamber of Commerce late on Thursday, Bernanke said a resurgence in financial market strains had dimmed the outlook for the U.S. economy, suggesting the central bank will cut rates when it meets on Dec. 11.
But some analysts said the market was likely to continue being driven by interest rate differentials rather than stronger growth prospects and expected further monetary easing to undermine the dollar.
Michael Woolfolk, currency strategist at Bank of New York Mellon, said signs of rising inflation in the euro zone could put the European Central Bank back into tightening mode next year.
"This means the euro at $1.50 is still a foregone conclusion, and we will probably see it in the run-up to the Dec. 11 Fed meeting," he said.
The Fed has since mid-September slashed its benchmark overnight lending rate by 75 basis point to 4.50 percent and is widely expected to cut by another 25 basis points next month.
The ECB has left rates on hold at 4 percent since June.
A separate report on Friday showing tame underlying U.S. inflation pressures in October also strengthened the case for more rate cuts.