Dollar Gains on Month-End Corporate Buying

The dollar rallied against most major currencies Thursday, buoyed by demand from U.S. corporations seeking to square their books by the end of the month.

Exchanging Dollars and Euros
Exchanging Dollars and Euros

The yen also rallied broadly after steep losses in the previous two sessions on lingering nervousness about the state of global credit markets.

Analysts said U.S. data on jobless claims and new-home sales for October did little to alter expectations that the Federal Reserve will reduce benchmark U.S. interest rates by a quarter percentage point to 4.25 percent next month.

Some are even predicting the Fed will ease by half a point.

But expectations of a rate cut failed to stem the rally in the dollar, whose recent losses, some analysts say, have gone too far.

Overstretched positioning in the dollar, which in recent weeks has plumbed historic troughs against a number of currencies, made it particularly vulnerable to a correction, analysts said.

"I think the dollar is holding up pretty well because some U.S. corporations are buying to close their books at the end of the month," said Rafael Martorell, chief currency dealer at BNP Paribas in New York.

"Overall, I get the sense that some people in the market believe the dollar's weakness has been too much and that we may see a bottom to it soon," he added.

Mid-afternoon in New York, the New York Board of Trade's U.S. dollar index, a gauge of the greenback against a basket of major currencies, was up 0.7 percent at 75.598, moving away from the record low of 74.712 struck last week.

The euro was down 0.5 percent against the dollar at $1.4753.

Some analysts have also suggested rate cuts could help the dollar indirectly as they would help avoid a U.S. recession.

Lower rates typically make dollar-denominated securities less attractive, reducing demand for the currency. However, given concerns about persistent weakness in the U.S. housing and credit markets, signs that the Fed will continue to act to help the U.S. economy should attract investment inflows.

"The currency market is closely paying attention to these potential investments that will help stabilize some financial companies. Overall, that is seen as positive for the dollar," said Manfred Wolf, director of corporate foreign exchange sales at HVB Bank in New York.

Expectations of a Fed rate cut next month and of more to come in 2008 got a boost after Fed Vice Chairman Donald Kohn said Wednesday that renewed financial market turmoil could slow the U.S. economy more abruptly than thought.

Reports on Thursday, which showed a jump in U.S. weekly jobless claims, third-quarter U.S. economic growth relatively in line with expectations, and the first quarterly drop in U.S. house prices in 13 years affirmed Kohn's view although the data had little impact on the dollar.

Dollar/yen , however, was one of the few negative currency pairs for the dollar, trading down 0.3 percent at 109.75.

Traders said it was being pressured by trading in euro/yen , which was down 0.9 percent at 161.95.

The Australian dollar dropped more than 1.0 percent to $96.85.

"There is still too much risk aversion going on, what with Libor rates going up, so I would sell the Aussie [Australian dollar] on rallies and buy the yen on weakness," said BNP's Martorell.

Investor focus now shifts to a speech by Fed Chairman Ben Bernanke late in the day.

The Fed slashed overnight lending rates by a half percentage point in September and by a further quarter point in October, bringing them down to 4.5 percent.