The dollar rose broadly on Friday, notching its biggest one-day gain against the euro in five months after US Treasury data showed foreigners were bigger than expected investors in US assets.
This week's barrage of comments from euro zone officials expressing concern about the surge in the value of the euro - up nearly 20 percent in 2003 against the dollar - showed no signs of abating, fuelling further dollar gains.
Their comments also fanned speculation that the European Central Bank could cut rates at its next meeting in February to stem the euro's climb, analysts said. However, a euro zone monetary source told Reuters the ECB would use interest rate cuts only as a last resort.
The ball really started rolling for the dollar after the US Treasury said net foreign purchases of US assets jumped to $87.6 billion in November, sharply higher than a revised $27.8 billion in October.
The US needs to attract roughly $1.5 billion a day in order to fill the gap in the current account deficit created by cash leaving to pay for imported goods and services.
The deficit creates downward selling pressure on the dollar and has been cited, along with 45-year-low benchmark interest rates, as reasons for foreigners to shy away from US assets.
"Investors thought (the Treasury data) was pretty good and that set up this bullish tone that pulled some money back toward the dollar from those with long euro positions.
It carried through all day," said Grant Wilson, senior foreign exchange trader at Mellon Bank in Pittsburgh.
"But this correction in the dollar, which is pretty well called for, does not derail the euro's uptrend," he said.
Adding to the dollar's advance was a bullish reading on the University of Michigan's preliminary survey on consumer sentiment, which came in at 103.2 in January, the highest in more than three years.
Even a smaller-than-expected increase in US industrial production did not dent the dollar's rally.
For the week the euro lost 3.56 percent against the dollar, the first loss in 10 weeks, according to Reuters data. On Friday, the euro fell to $1.2380, a loss of 1.53 percent, its worst performance since a 1.78 decline on August 21. The euro is five cents below Monday's record high $1.2989.
The euro fell to 132.07 yen, off 1.16 percent.
The dollar rose to 106.64 yen, up 0.25 percent on the day, after hitting a low around 105.73.
The dollar surged to 1.2654 Swiss francs, a gain of 1.58 percent on the day. Sterling fell to $1.7981, off 1.30 percent on the day. The Australian dollar dropped to US$0.7639, a loss of 0.86 percent.
While Treasury's capital flows report was welcomed, some private sector data shows the gains might prove short-lived.
"What we may see for December is another strong TIC report, but looking at the first half of January, we see so far an acceleration of foreign net selling of US fixed income, which is likely to continue and overshadow the continued net purchases of US equities," said Michael Woolfolk, senior currency strategist at Bank of New York.
According to the Bank of New York's proprietary custody flow data, in the month to January 15, foreigners were net sellers of $1.9 billion of US fixed income securities. But this was partially offset by well over $1 billion worth of foreign net purchases of US equities over the same period.
ECB Chief Economist Otmar Issing added downward pressure to the euro, saying the central bank was not indifferent to the currency's strength. After Issing, ECB council member Guy Quaden said a further rise in the euro was not desirable.
"There's a sudden shift in attitude in the sense that there is greater acceptance that the dollar is going to have a correction partly because of what may or may not happen at the G7 meeting," said Mike Malpede, senior foreign exchange analyst at Refco Group Ltd in Chicago.
The market is focused on how policy-makers from the Group of Seven major industrial countries will react to the dollar's weakness at their meeting in Florida on February 6-7.
US Treasury Secretary John Snow, visiting the New York Stock Exchange, reiterated the Bush administration's strong dollar policy and that markets should set currency rates, but his comments had little effect on the market.
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