Dollar slips on strong manufacturing reports

AP News
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Posted: Jan 04, 2010 3:37 PM

The dollar traded mostly lower Monday as reports of stronger manufacturing activity around the world drove investors to riskier assets such as stocks and commodities in hopes of bigger returns.

Markets continued to weigh weekend comments in which U.S. Federal Reserve Chairman Ben Bernanke did not rule out higher interest rates, however.

The 16-nation euro rose to $1.4412 in late New York trading, compared with $1.4326 at the end of trading last week.

The British pound slid to $1.6094 from $1.6149, and the dollar edged up to 92.60 Japanese yen from 92.34 yen.

Against a basket of six currencies, the dollar was down 0.5 percent in late afternoon trading.

The dollar had gained support after Bernanke on Sunday said stronger regulation was the best way to prevent financial speculation from getting out of hand and throwing the economy into a new crisis, but did not rule out higher interest rates to stop new speculative investment bubbles from forming.

Now currency markets are focused on whether the Federal Reserve might raise interest rates earlier than expected as the recovery advances. Higher interest rates, and the expectation of higher rates, can boost a currency as investors transfer funds to where they can earn higher returns.

"There wasn't a sense of urgency in Bernanke's comments, but he was dovish and markets are drifting from narrative to narrative," said David Gilmore of Foreign Exchange Analytics in Essex, Conn.

The Bank of England decides on interest rates Thursday. Most observers think the Bank will keep its benchmark interest rate unchanged at 0.5 percent and wait until February before deciding if a further expansion of the money supply is merited.

Meanwhile, an unexpectedly strong report on U.S. manufacturing activity Monday bolstered confidence in an economic recovery, encouraging investors to move out of cash and into riskier assets such as stocks and commodities that have the potential to earn bigger returns.

The Institute for Supply Management, a trade group of purchasing executives, said it was the fifth straight month of expansion and the highest reading for the index since April 2006. New orders, a signal of future production, jumped and indexes measuring production and employment also rose.

Earlier in the day, China posted its fastest rise in manufacturing output in five years in December. In Europe, a similar survey in the 16 countries that use the euro rose to a 21-month high and a manufacturing index for Britain rose to a 25-month high.

A separate U.S. report on construction spending sounded a more cautionary note. Construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The drop was bigger than expected.

In other late trading Monday, the dollar fell to 1.0294 Swiss francs from 1.0355 francs, and tumbled to 1.0422 Canadian dollars from 1.0531.