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Dollar keeps up rally against euro

/ Source: The Associated Press

The dollar kept up its post-holiday rally Thursday against the euro, which dropped below $1.32 for the first time in more than three weeks on weak economic data from Germany and suggestions that U.S. interest rates will rise.

The euro traded at $1.3176 by late afternoon in Europe, down from $1.3259 in late New York trading Wednesday and nearly 5 U.S. cents short of its all-time high, reached Dec. 30, of $1.3667.

The 12-nation currency has risen from $1.20 since September, powered by concern over the wide U.S. trade and budget deficits. It last traded below $1.32 on Dec. 13.

The British pound dropped to $1.8761 on Thursday, from $1.8850 in New York late Wednesday.

Positive U.S. economic data this week — along with minutes of the U.S. Federal Reserve’s Dec. 14 meeting, released Tuesday, that showed policy-makers suggesting that short-term interest rates need to move higher — have helped the dollar recover from its weakness during thin, volatile trading around Christmas.

Higher U.S. interest rates make U.S. bonds more attractive to investors, thereby supporting the dollar.

In addition, the euro was put under pressure Thursday by weak November retail sales figures from Germany, the euro zone’s biggest economy, currency strategists at Commerzbank in Frankfurt said.

The figures showed sales dropping by 2.5 percent on a seasonally adjusted basis from the previous month. Weak consumer demand has hampered Germany’s export-driven economic recovery; and the report was accompanied by data that showed consumer confidence in neighboring France falling in December.

The dollar’s rally was untroubled by a U.S. Labor Department report Thursday showing that the number of new people signing up for jobless benefits shot up last week.

But despite optimism this week over the U.S. economic outlook, worries over the twin deficits haven’t gone away — and many analysts expect the dollar to resume its fall this year.

“In the short term, the correction may continue because further Fed interest rate rises could be priced in,” the Commerzbank strategists wrote in a research note. “But in the medium to long term, the trade deficit is likely to remain decisive — so one should not assume that the current phase of dollar strength will turn into a longer-lasting trend.”

The dollar also rose against the Japanese yen, buying 105.04 yen in late European trading — above the 104.59 yen it fetched in late Tokyo trading and the 104.04 yen it bought in New York overnight.