The dollar strengthened this week to a two-month high against the euro and a 10-week high against the yen, helped by comments from Federal Reserve officials that suggested the recent hurricanes would not deter US policymakers from raising interest rates further.
Anthony Santomero, Philadelphia Fed president, said on Friday post-hurricane reconstruction would help the US economy bounce back in 2006.
There was further evidence of the need for monetary tightening from the Fed’s favoured measure of inflation, the core personal consumption expenditure deflator, which rose to 2 per cent in August, the upper limit of the forecast band for the fourth quarter.
The euro dropped to a low of $1.192 against the dollar on Tuesday but clawed back above $1.20 amid hopes of a German political settlement.
Better-than-expected data on Friday helped the single currency rise further after the eurozone business climate indicator reached positive territory for the first time in six months. “This confirms that the eurozone recovery is gathering momentum,” Lucy Hartiss of Capital Economics said.
The euro ended unchanged on the week at $1.2068 versus the dollar but 0.4 percent up on the pound at £0.6818.
The yen suffered, down 1.1 per cent against the dollar to Y113.36 and 1 per cent off versus the euro at Y136.69.
Less risk-averse Japanese investors have sought the higher yields of overseas investments. A sustained rise in core inflation is needed to trigger a change in Bank of Japan’s ultra-easy monetary policy. There is evidence deflation is persisting in Japan with September’s core consumer prices data for the Tokyo area, released on Friday, falling 0.4 per cent year-on-year.
Warning against premature monetary tightening Sadakazu Tanigaki, finance minister, said on Friday: “The economy is still in deflation, although it is moderate. There still needs to be an effort [to fight it].”
Sterling slid to a two-month low against the dollar of $1.7567 on Friday but recovered to end the week 0.7 per cent lower at $1.765.
The weakness of the UK economy was highlighted by a slip in UK consumer confidence, a CBI survey showing retail sales volumes falling at their fastest rate for 22 years and GDP growth sinking to its weakest for 12 years in the second quarter.
Merrill Lynch argued the pound was still overvalued. “Sterling weakness should become more apparent during the next 12 months as ... the Bank of England’s monetary policy committee is forced to cut interest rates further,” Alex Patelis of Merrill Lynch said in a research note.
The Canadian dollar eyed its 14-year high against the greenback of $1.1613 hit last week as natural gas prices climbed to record levels. Energy producers make up much of the Canadian economy and their shares have been popular with overseas investors. The loonie rose 0.7 per cent to $1.1649.
