Dollar Higher in Late Trade After Treasury Report
MarketWatch.com, May 17, 2005
NEW YORK (MarketWatch) - The dollar picked up strength late in the session Tuesday, after the Bush administration stepped up pressure on China to move toward a flexible exchange rate, without issuing a formal finding of currency manipulation against China.
The dollar in late trade rose to 107.44 yen, contrasting with 107.06 yen before the Treasury Department issued its foreign exchange report.
In a semiannual currency report, Treasury warned China that "if current trends continue without substantial alteration," the U.S. government is prepared to find that China is manipulating its currency.
Such a finding would trigger bilateral negotiations on the exchange rate and possible retaliatory action. The report also called China's fixed exchange rate a danger to the global economy.
The reports' impact on the dollar was positive but muted, said Brian Dolan, head of currency research at Gain Capital.
Currency players pushed the dollar lower before the reports on fears it would be dollar-negative, but later bid the currency higher on relief that the government did not issue a formal manipulation finding against China. Such a finding could have touched of a trade war, a situation that would have been bad for both countries.
In morning trade the dollar lost strength on unexpected news of a monthly decline in industrial production confirmed an image of weakening factory activity depicted a day earlier in the Empire State Manufacturing Survey.
The Federal Reserve reported that U.S. industrial production fell 0.2% in April and that capacity utilization fell to 79.2% from 79.4%.
Currency markets in recent weeks have focused on a lively debate about whether the economy has entered a soft phase. The two latest pieces of weak manufacturing data would support the theory that the U.S. is in a soft patch, indicating it is not necessary for the Federal Reserve to hike rates aggressively.
However, in opening trade the dollar was lifted by hopes that the Fed might switch to a more aggressive rates policy due to news of stronger-than-expected increases in producer prices and housing starts.
The Labor Department said U.S. wholesale prices increased 0.6% in April, as energy prices continued to push higher. The MarketWatch forecast was for a 0.4% increase.
Excluding food and energy, the producer price index increased 0.3%, outstripping the MarketWatch prediction of a 0.2% advance.
Separately, the Commerce Department reported that construction of new U.S. houses rose 11.0% in April to a seasonally adjusted 2.04 million annualized units.
The likely direction of U.S. monetary policy has been cloudier than usual in recent months due to a barrage of economic reports, some depicting strength, others signaling weakness.
Dollar proponents hope that strong data will convince the Fed that its current program of incremental, quarter-point rate increases is too tepid. They want the central bank to adopt a more aggressive series of half-point increases to slow down inflation and the economy.
In news involving the euro, a new Merrill Lynch survey of European fund managers concluded that a French rejection of the European constitution in a referendum later this month could have negative implications for the euro.
A total of 71% of 61 European specialist fund managers believe a "no" vote in the May 29 referendum would damage the euro. Around 43% think a "no" vote would cause bond prices to fall, while and 33% are concerned that a negative outcome could damage European equities, according to the May survey of 339 fund managers.
Japan's GDP surprise
Overnight the yen benefited from news that Japan's economy grew 1.3% in real terms in the first three months of this year, compared with the October-December period, and at an annualized pace of 5.3%, the Cabinet Office said in a preliminary report released Tuesday. See full story.
That was far better than on-quarter growth of 0.6% and annualized growth of 2.5% forecast by analysts surveyed by the Nihon Keizai Shimbun.
But the data raised fears about the strength of global demand as well hopes for the domestic economy, and investors realized that the initial yen-positive reaction to the headline figures was premature.
