The dollar steadied on Wednesday, clinging to hefty gains made a session earlier after strong US housing data reinforced expectations for higher interest rates in 2006.
The dollar has regained its poise in the past two sessions after dipping to a seven-week low against the yen in early trade on Monday and posting its worst weekly decline in six years last week.
"It seems like dollar/yen has at least found a temporary bottom," said Noriyuki Kato, treasury manager in Tokyo for State Street. "And with the euro we've tried the lows and the highs and now the market is going into a bit of a comfort zone."
The dollar was trading around 117.15 yen, down slightly from its level in US trade on Tuesday, when it rose around 1 percent, its biggest daily gain in seven weeks.
It briefly fell as low as 116.75 yen on electronic trading platform EBS. Traders cited heavy selling by a large Japanese institution, surprising many in the market who had expected quiet pre-holiday trade.
The US currency fell 4.25 percent against the yen last week as speculators unwound yen carry trades, marking a seven-week trough at 115.52 yen on Monday.
In such carry trades, investors borrow the yen to take advantage of its low interest rate and invest in higher-yielding currencies.
The euro, which this time last year was powering towards a record high of $1.3670, was trading in the middle of its range for the past month at $1.1865. It had tumbled 1.2 percent the previous day.
The dollar was bumped higher on Tuesday after data showed US housing starts rose in November to an annualised pace of 2.123 million units from an upwardly revised 2.017 million in October.
Since the booming housing market is thought to have been underpinning consumption - and the entire economy - a strong reading was seen fuelling optimism about the US economy.
Meanwhile, data showed the US producer price index fell 0.7 percent in November, more than 0.5 percent decline forecast by economists and after a 0.7 percent rise in October.
The tame reading did nothing to change a consensus in the market that the Federal Reserve will raise interest rates in January to 4.5 percent.
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