The dollar rallied against most currencies on Friday after Federal Reserve Chairman Alan Greenspan said market forces and tighter US fiscal policy should stabilise and may cut the US current account gap. The euro fell to its lowest level in almost three months below $1.2900, although its heavy losses against the yen also dragged the dollar lower against the Japanese currency.
"I think the Chairman's taking a much more sanguine view on the current account deficit than he's taken for some time," said Robert Sinche, head of currency strategy at Bank of America in New York.
"He's taking a longer-term view, laying out a set of conditions under which the current account deficit can improve this year and next," Sinche said.
Greenspan made his comments at a conference in London hosted by the British Treasury. His speech sent the dollar roaring back after it had earlier tumbled on the back of a softer-than-expected US jobs report.
Late afternoon in New York, the euro was down 0.8 percent at $1.2872 more than a cent and a half down from its session high hit immediately after the US employment data.
The euro was 1.1 percent weaker against the Japanese currency at 133.93 yen, which kept the dollar down 0.5 percent at 104.03 yen.
The dollar was up against other currencies, hitting a three-month high against the Swiss franc, while gold fell to a four-month low just below $414 an ounce.
The dollar had been hurt in recent months as Fed officials expressed concern over the swelling US current account deficit and suggested a further dollar fall would be needed to reverse it. But Greenspan struck a more optimistic tone on Friday. "Besides market pressures, which appear poised to stabilise and over the longer run possibly to decrease the US current account deficit and its attendant financing requirements, some forces in the domestic US economy seem about to head in the same direction," Greenspan said. Steven Englander, chief currency strategist for North America at Barclays Capital in New York, noted that the Fed chief's speech touched on dollar-negative factors too.
"But they are sublimated to the dollar-positive spin," Englander said. "For the moment the speech has to be taken as a dollar-positive." The New York session had started out badly for the dollar. US non-farm payrolls for January increased by 146,000, well below the 190,000 increase expected. The previous three months' job gains were also revised lower, although the January unemployment rate fell to 5.2 percent from 5.4 percent.
The dollar's decline was short-lived, however, as Greenspan's remarks hit the wires shortly after the release of January's jobs report. Investors focused on the Fed chief's comments rather than remarks by former US Treasury Secretary Robert Rubin, who said, at the same conference, that he believed the US budget and current account deficits could worsen.
Meanwhile, currency dealers digested a slew of headlines and news from the two-day meeting of Group of Seven finance ministers and central bankers in London, which got under way on Friday.
While several G7 officials and sources have said this week the final communique's language on foreign exchange will be broadly the same as that issued in their meeting in Boca Raton in Florida a year ago, currency traders are scrutinising all news relating to China and its currency peg. People's Bank of China Governor Zhou Xiaochuan said that its fixed exchange rate regime is not up for discussion "today." Beijing has said, however, that it will move to a flexible exchange rate policy at some point. "If nothing comes out of G7, we should see dollar/yen and euro/yen move higher," said Grant Wilson, senior currency dealer at Mellon Bank in Pittsburgh.
The dollar's reaction to a consumer sentiment survey was muted. The University of Michigan's final reading of its January index of consumer sentiment came in at 95.5, down from December's 97.1, according to a report released on Friday and seen by market sources. Economists were expecting a median final reading for the month of 96.0.