The dollar gained broadly on Wednesday as news that the U.S. trade gap narrowed for the third month in a row in November made a rate cut by the Federal Reserve seem even less likely in the first months of 2007.
The dollar was already enjoying its fifth rally in six trading days against a basket of major currencies when the government reported the U.S. trade deficit shrank for the third consecutive month to the narrowest reading since July 2005.
The drop in the deficit helped soothe some of the concern about the long-term drag of the deficit on the dollar as the U.S. government and private sector rely increasingly on foreign purchases of U.S. assets to finance their borrowing.
More importantly, analysts said, the dollar was getting a boost from the positive impact of the drop in the trade gap on economic growth in the final three months of the year.
"It's not so much about trade and the current account deficit, but what it means for fourth-quarter GDP," said Marc Chandler, global currency strategist at Brown Brothers Harriman in New York.
"The real focus today is growth and the trade number points to stronger growth," he said.
Benchmark U.S. Treasury yields rose as a result, giving the dollar another pillar of support.
The euro is , down for a second day in a row, although losses were limited by investor caution ahead of the European Central Bank's policy meeting on Thursday.
The ECB is expected to signal a rate hike will occur in February.
While the trade number was the latest in a steady run of firm economic data and gave the dollar a lift, it is not usually instrumental for setting monetary policy and the market's focus will likely shift to comments expected later in the session from Chicago Fed President Michael Moskow.
"Overall, it does add to the dollar's upbeat tone this morning. We saw the dollar firm a little bit on the news," said Omer Esiner, market analyst with Ruesch International in Washington D.C.
Fed's Moskow Still Focused On Inflation
Chicago Federal Reserve President Michael Moskow said that inflation risks, including those from a strong labor market, remained his major worry.
"My predominant concern remains the risks to the inflation outlook," Moskow said in comments prepared for a speech to local business leaders. An advance copy was made available.
"There is still the risk that resource pressures or other factors, such as elevated inflation expectations, could prevent actual inflation from falling in a timely fashion," he said.
He said the labor market is "vibrant" and that jobs growth had been strong over the past six months.
Financial markets reflect that investors now believe a rate cut will likely materialize by the end of the third quarter, if inflation continues to moderate along with growth as the Fed expects, compared with expectations a month ago for a rate cut as soon as the first quarter of 2007.
The dollar is also up against the yen and sterling.