MW: Dollar slides on fresh signs of economic strength
SAN FRANCISCO (MarketWatch) -- The U.S. dollar slipped against its major rivals Wednesday after a fresh show of strength in U.S. manufacturing buoyed stocks and encouraged sellers of low-yielding assets.
Still, the greenback came off yearly lows reached in early in the U.S. session. Investors also weighed data that showed non-U.S. investors sold U.S. assets in July, but China and Japan were net buyers.
The dollar index (DXY 76.29, -0.26, -0.33%) , a measure of the greenback against a trade-weighted basket of major currencies, fell to 76.337, down about 0.2% from its level late Tuesday. It had dipped to 76.187 earlier.
The euro traded at $1.4704, up from $1.4671 Tuesday afternoon.
The dollar also slipped against the Japanese yen, falling to 90.88 Japanese yen from 91.37 yen Tuesday. Remarks from Japan's new finance minister underscored the country's reluctance to intervene in currency markets to arrest the yen's rise.
"We are still bearish dollars," said Kathy Lien, director of currency research at Global Forex Trading wrote in an email. "Not only is it one of the cheapest funding currencies, but it stands to lose value on both good and bad news," she said.
The decline in the U.S. dollar, which got underway in early March as investors started to buy stocks and higher-yielding currencies, has accelerated in recent days as investors bet economic growth will take wing but central banks will keep rates low and cash flush for some time.
With the Federal Reserve's target rates near zero percent and its quantitative easing programs pumping trillions of extra dollars into the economy, the U.S. dollar is considered one of the lowest yielding currencies, making it an attractive unit to borrow to fund purchases of other assets with higher expected returns.
Busier factories, rising stocks
Bolstering the case for economic recovery Wednesday, the Federal Reserve said the output of the nation's factories, mines and utilities rose a more-than-forecast 0.8% in August, and was much stronger in July than first estimated, the Federal Reserve said Wednesday.
The Labor Department said its consumer price index rose 0.4%, a little more than economists expected. Excluding food and energy, CPI rose 0.1%. See more on CPI.
U.S. stocks rallied. The S&P 500 (SPX 1,064, +11.18, +1.06%) gained 10 points, or 0.9%, to 1,062, its highest level since early October.
Signs of economic strength are a mixed bag for the greenback, Lien said.
"If the U.S. economy continues to improve, the willingness of investors to take on risk will ease safe-haven flows out of the dollar," Lien said. "If the pace of improvement in the economy slows, traders may start thinking that the U.S. recovery could trail the other nations," sending the dollar lower as interest-rate differentials favor other countries.
Also Wednesday, showed U.S. government data showed non-U.S. investors sold U.S. assets in July but some key buyers kept up purchases.
The Treasury Department said foreigners sold $97.5 billion in U.S. assets in July, after a $56.8 billion outflow in June that analysts said was higher than previously reported.
China and Japan -- the biggest holders of U.S. Treasurys -- were net buyers of U.S. assets in July, according to Win Thin, senior currency strategist at Brown Brothers Harriman.
"Bottom line: The big global reserve managers, with the possible exception of Russia, are not dumping U.S. dollar assets on a sustained basis," Thin wrote in a report.
"China and Japan holdings are sometimes volatile on a month to month basis, but the upward trend in U.S. Treasury holdings is unmistakable, despite China's sporadic warnings about the dollar."
The TICs data is typically reviewed for insight into trends but, because it's several months old, doesn't usually impact daily prices.
Separately, the Commerce Department said the U.S. current account deficit narrowed to $98.8 billion in the second quarter, or 2.8% of gross domestic product. See more on current-account deficit.
The weak current account is one reason the dollar has been under pressure, analysts say.
Still to come, the National Association of Home Builders' survey for September at is set for release at 1 p.m. Eastern time.
Yen intervention
Helping the yen, incoming Japanese Finance Minister Hirohisa Fujii was quoted Wednesday as saying he was opposed to intervention in currency markets as long as moves are gradual. See related story.
"I don't think they are fluctuating rapidly now," Fujii told reporters, according to Reuters.
The remarks echoed views expressed by Fujii earlier this month, when he said the government should only take action when the yen makes abnormal moves, analysts said.
"The tone of the new government with respect to the yen has limited the fear in the market with respect to the potential for intervention against yen strength," said Jane Foley, director of research at Forex.com, in an email.
Meanwhile, the yen's gains have underscored traders' preference for the U.S. dollar as a funding currency for carry trades, she said.
Carry trades consist of borrowing in a low-yielding currency, then purchasing assets denominated in higher-yielding currencies.
Warnings Wednesday by Fed Chairman Ben Bernanke and Bank of England Gov. Mervyn King over the weakness of any economic recovery reinforces concerns the global economy isn't out of the woods, she said.
But for now, Bernanke's Tuesday remarks appeared to be fueling a positive tone in equity markets. Bernanke said the U.S. recession, at least from a technical standpoint, was likely over.
