Dollar Closes August with Best Monthly Gain in 16 Years

The U.S. dollar rallied against a currency basket Friday, on track for its best monthly gain in nearly 16 years, boosted by a batch of data showing a far more stable growth path for the United States than the rest of the world.

U.S. consumer spending slowed in July, but this was more than offset by a report showing business activity in the U.S. Midwest expanded at a more robust rate than expected, fueling a round of dollar buying.

"The U.S. data contrasts with weaker reports from abroad as the global economy deepens its slowdown,'' said Joe Manimbo, a currency trader at Ruesch International in Washington. "This is a continuation of the more upbeat sentiment on the U.S. currency.''

Separate data showing U.S. consumer confidence rose to a five-month high in August, posting a sharp recovery from depressed levels with the help of easing energy prices, added to dollar optimism even, if it offered little new trading impetus.

In late New York trading, the dollar index on the ICE Futures Exchange was up 0.3 percent on the day at 77.327. Friday's gains have put the index on pace for its best monthly performance since October 1992, according to Reuters data.

The euro was down at almost $1.4, off more than 8 percent from its all time peak set in mid-July and on pace for its worst monthly loss since its launch in 1999.

Friday's reports follow data earlier in the week showing greater-than-expected U.S. economic growth in the second quarter and strong durable goods orders for July.

The dollar was down against the yen at around 108 yen, but was up nearly 1 percent this month.

The U.S. dollar rose 1.2 percent versus the Canadian dollar to C$1.0631, its biggest one-day gain in three weeks, after data showed the Canadian economy narrowly skirted a recession in the second quarter, growing 0.3 percent. Economists were expecting a 0.7 percent expansion.

Weak Canadian Dollar, Sterling

Still, some analysts say a weak gross domestic product number is not sufficient to warrant an interest rate cut from the Bank of Canada.

"Though Canadian growth may prove slightly weaker than expected in H1 2008, the accumulated impact of rate cuts to date should help cushion any downside risks,'' said analysts at Morgan Stanley in a research note.

"On the other hand, inflation remains elevated, even if the recent decline in commodity prices suggests scope for softening price pressures.''

Sterling was also one of the major casualties in the currency market this month, down 8.1 percent versus the dollar, its biggest drop since it crashed out of the Exchange Rate Mechanism in 1992.

The pound last traded down 0.4 percent at $1.8207 on the day.

The Australian dollar fell nearly 9 percent in August, its worst month since February 1989, according to Reuters data, on expectations of narrowing interest rate differentials between
the United States and Australia. It last traded at US$0.8579 , down 0.6 percent.

Investors expect sentiment on the U.S. dollar to remain bullish in the coming week. But some market participants could to try to square positions by selling into any dollar strength ahead of next Friday's August U.S. employment report and central bank policy decisions in the euro zone and the UK.

Analysts expect next week's U.S. non-farm payrolls report to show a 73,000 contraction, according to a Reuters poll.

"U.S. payrolls will likely show a decline, but markets will only be moved if losses exceed 100,000, having gotten used to the slow drip of job shedding this year,'' said Avery Shenfeld, a senior economist at CIBC World Markets in Toronto.