The dollar advanced broadly on Friday, as generally robust data from the US housing and manufacturing sectors provided further evidence the economy is more resilient than many initially thought. That should reinforce the view the Federal Reserve may hold interest rates steady at 5.25 percent this year, and not cut them as previously expected.
"The data was pretty good overall. Durables surprised to the upside and December home sales may have been weather-related, but this is giving us some hope that the housing market correction will not be much deeper," said Carl Forcheski, vice president of corporate foreign exchange at Societe Generale in New York.
The dollar rose after a government report showed that while new-home sales posted their biggest drop in 16 years in 2006, sales picked up in December. That followed a report on new orders for US-made durable goods, which increased by a larger-than-expected 3.1 percent in December.
"These have supported the dollar because they have pushed out expectations of a rate cut in the middle of the year which had been universally expected up until a month ago," Forcheski said. Interest rate futures on Friday continued to suggest that the policy-setting Federal Open Market Committee will hold the fed funds rate unchanged at next week's meeting and potentially for the whole of 2007. They also showed a slim chance of a rate hike by June.
In late afternoon trading, the euro was down 0.1 percent against the dollar at $1.2918. Against a basket of currencies, the dollar traded to a two-month high at around 85.43. It last traded at 85.25.
Next week, markets are bracing for a slew of US economic data and events led by the FOMC meeting, the non-farm payrolls report, and a key manufacturing survey. That should help determine where the dollar and US interest rates are headed this year.
"The Fed won't shock anyone by leaving rates unchanged ... nor will the accompanying statement, citing improved near-term growth and a continued tightening bias, sentiments that the market has already heard from Fed speakers," said Avery Shenfeld, senior economist at CIBC World Markets in Toronto. "That puts the focus on fresh economic reports, with a flood of data due," he added.
The dollar was up 0.3 percent against the yen at 121.54 yen. The euro was up 0.2 percent at 156.99 yen. The yen has already given up nearly all its hefty gains made in the last two days against the dollar when investors rushed to reverse extreme short positions and unwind carry trades. The yen's rally came amid speculation the weak Japanese currency could be discussed at next month's Group of Seven meeting.
Any sharp appreciation of the yen could erase profits from carry trades, where investors borrow in low-yielding currencies to buy assets in countries with higher interest rates. But after digesting a barrage of comments from European and Japanese officials, most analysts concluded for now that the February 9-10 summit would not yield a group statement on the yen.
Analysts said demand for yen started to wane in Asian trading as soft Japanese inflation figures cast doubt on whether the Bank of Japan will raise rates next month.
Japanese core consumer prices rose just 0.1 percent in December from a year earlier, suggesting Japan is struggling to shake off a decade of deflation and adding to speculation the BOJ may keep rates at 0.25 percent at its February meeting. Elsewhere in the market, the dollar rose 0.4 percent against the Swiss franc to 1.2535 francs, while sterling slipped 0.2 percent to $1.9593.
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