The dollar strengthened on Tuesday as a brace of US data releases pointed to an economy in rude health.
Industrial production rose by a faster-than-expected 0.6 per cent in December, with November’s reading also revised higher.
Perhaps more importantly, capacity utilisation rose to 80.7 per cent, its highest level since November 2000. “This may heighten inflation concerns,” said James Knightley, economist at ING Financial Markets, who forecast at least two more quarter-point rate rises from the Federal Reserve, “which could result in dollar strength before the end of the quarter”.
Michael Woolfolk, senior currency strategist at Bank of New York, argued that the data, combined with last week’s solid trade and retail sales reports, “should help raise expectations of fourth quarter GDP growth, assuaging some concerns over a particularly negative hurricane-related shock”.
Earlier the Empire State manufacturing index, which records the health of the sector in the New York region, had come in marginally below forecasts. However the individual components were stronger, with the prices received measure jumping to 27.4 in January from 17.8 in December, suggesting that manufacturers may be beginning to recover some pricing power.
Fed funds futures remained unchanged, with the market pricing in a 56 per cent probability that a widely expected January rate rise is followed by another hike in March.
However the dollar gained ground, firming 0.5 per cent to $1.2076 against the euro, 0.8 per cent to Y115.80 against the yen, 0.3 per cent to $1.7627 against sterling and 0.5 per cent to C$1.1641 against the Canadian dollar.
Not everyone was convinced by this explanation, with Adrian Hughes, currency strategist at HSBC, instead arguing that intraday volatility had forced traders to stop-out of positions they were trying to build, such as long euro/dollar, pushing the dollar up in the process.
Other major currencies were little changed. Sterling initially fell after the release of softer-than-expected UK consumer price inflation, which built on weak factory gate inflation numbers released on Monday.
However, with the Bank of England not seen moving UK interest rates in either direction for the foreseeable future, the pound later recovered to sit 0.5 per cent firmer on the day at Y204.08 against the yen.
The yen withstood Tuesday’s 2.8 per cent fall in the Nikkei 225 index. But with Japan forced to import virtually all its fossil fuel, a sharp jump in oil prices undermined the currency, sending the yen 0.4 per cent lower against both the euro and Australian dollar to Y139.83 and Y86.99 respectively.
The New Zealand dollar was another to underperform; its 0.8 per cent slide to $0.6893 against its US counterpart, taking its two-day loss to 1.2 per cent.
The catalyst for the sell-off was the release of weak New Zealand business confidence data, with a net 61 per cent of companies surveyed in the fourth quarter of 2005 saying they expected business conditions to deteriorate, up from 32 per cent in the third quarter and the lowest reading since 1986.
The Norwegian krone was another currency to experience weakness, slipping 0.3 per cent to an eight-month low of NKr8.0938 to the euro as last week’s soft inflation data continued to weigh on the prospects for further rate rises.
The Polish zloty fell 0.9 per cent to 3.8363 zlotys to the euro amid fears that the ruling Law and Justice party may fail to win enough support to steer its budget proposals through parliament next week, potentially ushering in early elections.
And the Ukrainian hryvnia fell hit a nine-month low of 5.096 hryvnias to the dollar amid a constitutional crisis, with parliament having voted to dismiss the government.