The US dollar pared gains against the euro on Friday after the head of the European Central Bank said euro zone recovery was on track, but an improving economic outlook should keep the greenback firm. The euro came back after ECB President Jean-Claude Trichet said that since the start of the recovery in the third quarter of 2009 the bank has revised upward every growth projection for the euro zone.
-- Dollar in favour after better-than-expected economic data
-- Aussie gains after China raises banks' reserve requirement
In early afternoon New York trade, the euro was 0.12 percent lower at $1.3226, but above the session's low of $1.3179. US Treasuries fell in price, capping off a week of relatively aggressive selling spurred by rising growth outlooks and deficit worries, which may have bonds on track for even higher yields.
The sharp rise in US Treasury yields over the past week has boosted the dollar on the view that the Obama administration's proposed tax cut extension would spur economic growth. Lower Treasury prices bode well for the dollar as it increases demand for higher yielding assets.
Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, said US developments are supportive for the greenback, with the October trade deficit narrowing more than expected, while US bond yields are higher. "While the week appears to be ending on a better note for the greenback we continue to watch US yields very closely," he wrote. "We suspect the path of US yields will remain the key driver of the US currency's path in the near-term."
The US trade deficit narrowed much more than expected in October, a Commerce Department report showed. A Thomson Reuters/ University of Michigan Surveys of Consumers' preliminary December consumer sentiment index rose to 74.2 from 71.6 in the final November reading, according to a report. Economists in a Reuters survey expected a preliminary December reading of 72.5.
"The strength of the US dollar could be viewed as waning if it can be demonstrated credibly that US deficits will rise and conversely the euro could rise comparatively," said Tim Speiss, chairman, Personal Wealth Advisors at EisnerAmper LLP in New York.
"However, the EU has it's hands full with financing costs related Ireland and Greece, and potentially Spain and Portugal, so we see no dramatic negative dollar impact tied to this legislation at this juncture," he said. The US dollar index, which tracks the greenback's performance against a basket of major currencies, rose 0.03 percent to 80.097, struggling to break through the 80.00-81.50 barrier that capped its November rally.
Against the Japanese currency, the greenback was up 0.29 percent at 83.92 yen. but below the session's high of 84.01. The Aussie - which is most sensitive to monetary tightening in China given Australia's close trading links with the country - dipped briefly after Beijing increased the reserve requirement by 50 basis points.
The Australian dollar rose 0.05 percent to $0.9848, but below the session's high of $0.9896. Analysts warned, however, that a China rate rise was still possible as the country battles to stem inflationary pressures. Meanwhile, Germany and France pledged on Friday to better align their tax and labour policies to foster convergence in the euro zone. They rejected calls for an increase in the bloc's rescue fund and joint sovereign bonds.
Earlier on Friday, European central bankers told euro zone governments they could not count on the ECB alone to solve a debt crisis which has forced bailouts of Greece and Ireland, and heaped pressure on countries like Portugal and Spain. Chancellor Angela Merkel and French President Nicolas Sarkozy presented a united front ahead of a crucial summit next week where EU leaders are expected to agree the terms of a permanent rescue mechanism for the bloc. Ireland's government will seek parliamentary approval for an 85-billion-euro IMF/EU rescue package next week, though there were concerns about political infighting as the opposition Labour Party pledged to vote against it.
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