NEW YORK (Dow Jones)--The dollar slipped from six-month highs Monday as evidence of a global economic recovery drove investors to higher-yielding currencies.
"The data are helping" improve investor sentiment, said Matthew Strauss, currency strategist at RBC Capital Markets in Toronto. The recent selloff in the euro and other higher-yielding assets may have been "a bit excessive, and you see some bargain hunters coming back into the market."
Traders were looking ahead to Friday's U.S. non-farm payrolls report for evidence of the strength of an economic rebound, noting that long-term demand for dollars is likely to be strong as the U.S. economy recovers.
Late Monday, the euro was at $1.3930, up from $1.3866 late Friday, according to EBS via CQG. The dollar was at Y90.65, up from Y90.29, while the euro was at Y126.29, up from Y125.22. The U.K. pound was at $1.5962, down from $1.6004. The dollar was at CHF1.0561, down from CHF1.0606.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 79.194, down from 79.452. The index overnight hit a fresh six-month high of 79.534.
As a result, Deutsche Bank's PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was up 0.41% from late Friday, while its PowerShares US Dollar Index Bullish (UUP) was down 0.47%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE's Dollar Index.
The euro's gain on the dollar granted it a reprieve from recent concerns over Greek debt. Analysts warned the reprieve could be short-lived, especially if fiscal issues in the euro zone's periphery infect the core of the monetary union.
For now, growth-sensitive currencies, such as the euro, the commodity-backed Australian and New Zealand dollars and emerging-market currencies, were gaining on the back of the rosy global data, which stoked risk appetite.
To see the euro's moves against the dollar, please see: http://dowjoneswebservices.com/chart/view/3369
A January index of U.S. manufacturing released Monday hit its highest level since August 2004, further entrenching the idea that the global economy is clawing its way out of a hole.
The U.S. factory sector booked its best performance in more than five years in January, amid a rebound in hiring and rising price pressures, the Institute for Supply Management said. Its index of manufacturing activity moved to 58.4 in January, the best reading since August 2004, from 54.9 in December and 53.7 in November. Readings over 50 indicate growth and describe the breadth, but not the magnitude, of the change. Economists had expected the index to come in at 55.3.
The strong U.S. data came on top of positive overnight data from the euro zone, where a stronger-than-expected manufacturing sector purchasing managers' index helped the euro stage an earlier rebound. The index rose at its fastest pace in two years in January, according to a Markit Economics report.
Even with the euro's bounce, it might not last for long if the sovereign-debt concerns over Greece, Portugal and other euro-zone nations again rear their heads, analysts warned.
At the moment, the spreads to insure against default on Greek sovereign bonds have tightened, indicating a slight improvement in investor sentiment toward the problems facing Greece, said Jacob Oubina, currency strategist at Forex.com in Bedminster, N.J.
"They're still not out of the woods," he said. "Far from it." In fact, concerns could spread to Spain, analysts said, which could again put the euro under pressure.
Meanwhile, the U.K. pound failed to benefit from the strongest U.K. manufacturing data reported in more than 15 years, as uncertain investors sold off sterling over uncertainty about whether the Bank of England would end the bond-buying program--known as quantitative easing--it enacted to stimulate the economy.
Investors sold off the pound as they looked toward Thursday's Bank of England meeting, when the Monetary Policy Committee will announce whether its bond-buying program will continue.
Lloyds TSB analysts in London said the BOE finds itself in a "Catch 22" position, with the U.K. pound likely to be hit no matter whether the committee decides to end the bond-buying program or to continue it.
Ending the program could leave investors wondering whether an economic rebound can gain traction without stimulus; and continuing the program might lead investors to conclude a recovery is too weak to take hold without the help of stimulus.
The pound had recovered some of its earlier loses, but still was down nearly 0.2% by afternoon trading in New York.
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