The dollar surged to a fresh nine-month high against the euro on Friday as its recent rally gained extra momentum from a narrower-than-expected US trade deficit. The trade gap widened to $56.96 billion in April the fourth widest on record but was narrower than the $58.0 billion anticipated by economists.
March's shortfall was also revised downward to $53.56 billion from $55 billion. The numbers suggest slightly less foreign capital is needed to fund the US trade deficit, easing the financing pressures that have weighed on the dollar in recent years.
They also suggest economic growth forecasts might be raised slightly.
"On the margins, it's working in favour of stronger growth in the US," said Sophia Dresses, currency strategist at Morgan Stanley in New York, referring to the Commerce Department's latest trade report.
Late on Friday, the euro was languishing at $1.2118, down almost 1 percent compared with late Thursday.
The beleaguered currency, which was trading above $1.29 only a month ago, slumped as low as $1.2108 on Friday, its weakest level since September 8, 2004.
The dollar also hit a fresh eight-month high of 1.2701 Swiss francs.
Late on Friday, the dollar was up more than 1 percent on the day at 1.2686 Swiss francs.
Against the yen, the dollar overcame investors protecting an options-related position at 108 yen and good selling from Japanese exporters to gain over 1 percent to 108.61 yen.
Sterling dipped 0.5 percent to $1.8120. The euro slumped to a 10-month low of 66.77 pence. The Federal Reserve's program of raising interest rates and relatively solid US economic growth compared to Europe and Japan are forcing dealers to unwind the massive bets against the dollar built up over recent years.
"It's clear there has been a major shift in sentiment towards the euro and the dollar," said Dross's at Morgan Stanley. "Yes, structural imbalances persist in the US but they're much less of a focus: the Fed is raising rates and interest rate differentials are moving in favour of the dollar.
Making it much more expensive to short (sell) the dollar."
The economic and political malaise afflicting the euro zone is also hammering euro sentiment. The euro has fallen more than 10 percent against the dollar so far this year.
The greenback is up more than 11 percent against the Swiss franc this year. Markets are also on alert for comments from a meeting of finance ministers from the Group of Seven industrialised nations plus Russia on Friday and Saturday in London, with China's economy and its yuan policy expected to be on the agenda.
Some analysts see bullish sentiment on the dollar spilling over into the weekend meetings. "The US is in a better position going into these (G8) meetings than it has previously," said Laura Rhame, foreign exchange strategist with Credit Suisse First Boston.
"The rest of the G8 has complained about the US 'twin' deficit issue but the government can for the first time in a long time boast progress on the deficits," Rhame added.
The Treasury Department said on Friday that the government's deficit in May shrunk to $35.29 billion from $62.46 billion the same month a year, the smallest May deficit since 2001.
Economists had expected a shortfall of $47.5 billion. Concerns whether the US can continue to attract capital to finance its trade and budget deficits helped to push the dollar index down 30 percent over the three years to the end of 2004.
Investors this year have focused more on interest rate and economic growth differentials that have mostly favoured the United States rather than structural US imbalances.
Fed Chairman Alan Greenspan told Congress on Thursday that the US economy is on a pretty firm footing, which currency dealers took as a green light for further increases in interest rates.
Recent comments by other Fed officials had suggested the US central bank might be nearing the end of its rate-raising cycle. The Fed has raised short-term borrowing costs eight times since last June to 3 percent in a bid to head off inflation.
That contrasts with the euro zone, where rates have been stuck at 2 percent since June 2003, and many think the next move by the European Central Bank could be a rate cut.
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