The dollar hit a three-month high against the yen on Thursday after a report showed that business activity in the US Midwest expanded at a faster rate than expected in May.

The report helped the dollar recoup earlier losses following the release of weaker-than-expected first-quarter US growth figures.

The dollar rose to Y121.98 against the yen, its highest level since mid-February, before easing back to stand flat at Y121.70 by midday in New York.

Ashraf Laidi, chief FX analyst at CMC Markets, said that Thursday’s mixed US data would serve to stabilise the dollar rather than boost it, with Friday’s US employment report playing a bigger role in determining the fate of the market’s underlying short positions in the US currency.

Indeed, the dollar eased 0.2 per cent to $1.3460 against the euro and 0.2 per cent to $1.9805 against the pound.

The high-yielding Australian and New Zealand dollars advanced, boosted by a strong performance from global equity markets.

Analysts said that buoyant stock markets had lifted risk appetite and sparked fresh demand for carry trades, in which the purchase of riskier, high-yielding assets is funded by selling low-yielding currencies such as the yen.

The Australian dollar rose 0.4 per cent to $0.8266 against its US counterpart and 0.3 per cent to Y100.31 against the yen, while the New Zealand dollar climbed 0.6 per cent to $0.7316 and 0.8 per cent to Y89.56 against the US and Japanese currencies respectively.

However, Adrian Schmidt, senior foreign exchange strategist at Royal Bank of Scotland, warned that investors should be selective as to which high-yielding currencies they bought given contrasting economic data released on Thursday. He said that while robust Australian capital spending figures could support the Australian currency, the sharp decline in New Zealand business confidence figures should concern investors.

He said that the high level of New Zealand interest rates, combined with its strong currency and heavily indebted consumer sector meant the New Zealand economy was living on borrowed time, as well as borrowed money. He added that the sharp drop in confidence looked like an early warning sign.

“The rally in the New Zealand looks like a selling opportunity,” said Mr Schmidt. “There looks to be better value in other high yielders, with the Mexican peso standing out.”

The Mexican peso rose 0.5 per cent to 10.7349 pesos against the dollar.

Elsewhere, the Norwegian krone rose 0.6 per cent to NKr6.0300 against the dollar after figures showed a sharper-than-expected rise in April retail sales and an above-forecast drop in unemployment in May.

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