The dollar edged up against the euro on Wednesday to hover near a one-month high hit the previous day, continuing to draw support from gains in US stocks on hopes for an aggressive stimulus package from the Obama administration. Persistent signs of economic weakness in the euro zone that may force its central bank to cut interest rates further helped pressure the euro against the dollar, as well as the yen.
The yen fell towards a one-month low against the dollar. It gave up earlier gains on a newspaper report that Japan's government will seek to scrap capital gains taxes for foreigners investing in Japanese companies through funds, which could encourage capital flows into the country.
The dollar drew strength from early 2009 gains in Wall Street shares, which also helped the currency market to ignore dismal economic data including Tuesday's figures showing a steep drop in factory orders and pending home sales in November.
"US stocks, hopes for Obama, and a reversal of the broad dollar-selling positions made in December will support the dollar, possibly until Obama officially takes office later this month," said Kengo Suzuki, a currency strategist at Shinko Securities.
"But the state of the US economy is so miserable. That will prompt market players sooner or later to question the wisdom of extended dollar buying," Suzuki said. The Federal Reserve's most recent policy meeting suggested the central bank is concerned that downside risks remain substantial, although that did not dent the overall positive sentiment surrounding the dollar on Tuesday.
Traders will look to the ADP private employment report in the US due later in the day for clues to Friday's non-farm payrolls data for December from the government. They said the current market bias is for dollar buying underpinned by hopes for action from the new administration even if economic figures are weak in the near term.
"After recent bleak economic figures, the jobs market data this week may not provide a negative surprise. It is certain to illustrate further deterioration in the US jobs market," said a trader at a Japanese bank. "The dollar may decline to some extent in reaction to the data after recent rallies in the currency, but losses will be limited," he said.
The euro dropped 0.1 percent to $1.3520, after having tuzone inflation boosted expectations the European Central Bank will continue to cut interest rates, which would likely reduce the appeal of the euro zone currency against the dollar and other major currencies.
The dollar index, a gauge of the greenback's performance against six major currencies, was little changed at 82.818, in sight of a one-month high of 84.023 touched the previous day. The dollar was steady at 93.69 yen, rebounding from the day's low of 93.20 yen and moving towards a one-month high of 94.65 yen touched the previous day on EBS. The Nikkei share average climbed 1.7 percent, hitting a two-month closing high.
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