The US dollar weakened against the euro on Thursday, after a report showed April capital flows into the country dropped sharply, and were not enough to cover the US trade deficit. However, against a basket of major currencies, the dollar remained within striking distance of seven-week highs reached on Tuesday.
Foreign investment in US assets in April, particularly from private investors, was the lowest in more than a year and unable to offset that month's trade deficit for the first time since December 2005.
But other US economic data left traders with little fresh sense of where the US economy was heading. "The Treasury flows data were certainly dollar-negative, although the lack of meaningful price action shows you that traders are pretty confused," said Kathy Lien, chief currency strategist at Forex Capital Markets in New York.
By late afternoon in New York, the euro was at $1.2631, up 0.2 percent from late on Wednesday but off session highs of $1.2658. On Tuesday the euro hit a 1-1/2 month low of $1.2528. The dollar was down 0.2 percent at 114.75 yen. Lien said traders overall hesitated to accumulate more short dollar positions, because the Federal Reserve has been so "aggressively hawkish" on inflation, suggesting US interest rates will go higher.
Weakness in the dollar for the second consecutive session was significant since the futures markets reflected increased chances of two more rate rises by the Federal Reserve later this month and in August. The drop-off in portfolio flows into US assets in April revived concerns about global economic imbalances emphasised by the Group of Seven rich nations which met in April.
US net capital inflows in April dropped to $46.7 billion from an upwardly revised $70.4 billion in March, and were dragged lower by a large downswing in private investment in dollar-denominated assets, data from the US Treasury showed.
The trade deficit in April was $63.4 billion. Analysts said US net inflows numbers could worsen in May. "Considering the dollar's 2.6 percent decline in May (trade weighted terms) and the S&P 500's 3.1 percent drop in the same month, the May TICS report (due in July) should show further declines in net foreign capital flows, which will indicate a widening shortfall of trade deficit financing," said Ashraf Laidi, chief currency analyst at MG Financial in New York.
Expectations for rising interest rates helped the dollar pull up from a one-year low against the euro at the start of the month, and from an 8-month trough versus the yen in May, but the rally is losing steam. On Thursday, Fed Governor Randall Kroszner became the latest Fed official to sound a warning on inflation.
"Bernanke is trying to validate his rationale for being aggressive in raising interest rates. At a time, when his credibility has been questioned, he's trying to hold a strong stance on inflation," said Lien of Forex Capital Markets.
The comments from Fed officials failed to move the dollar.