The dollar marched higher on Tuesday, closing in on a 14-month high versus the yen on expectations Federal Reserve chief Alan Greenspan would paint a bright picture of the US economy. Greenspan's semi-annual testimony to Congress on Wednesday is expected to support the US currency by signalling that interest rates could push higher, raising the attraction of dollar deposits.
Although the dollar dipped on Monday after US capital flows data showed foreign investors' appetite for US stocks had waned in May, the spectre of rising US rates kept many traders bullish on the currency.
"The dollar's fall after the capital flows data was fairly limited," said a trader at a British bank in Tokyo. "I think the dollar will keep rising given the relative strength of the US economy." The dollar fetched 112.30 yen, up about 0.3 percent from its level in late US trade, and not far from a 14-month high of around 112.60 yen struck on July 8.
"The dollar now has 115 to 120 yen in sight," said the British bank trader.
The euro bought $1.2005, down about 0.4 percent from late New York trade, and well below a one-month high of around $1.2255 hit last week.
"It's hard for people to take big positions either way ahead of Greenspan," said Nobuaki Kubo, forex planning manager at Resona Bank. "But he probably won't say anything that will overturn the trend of a strong dollar." Greenspan said in remarks released on Monday that although soaring oil prices have hampered US economic growth, the economy was coping well and set to expand at a moderate pace.
St. Louis Fed President William Poole echoed that optimism on the economy and added that inflation was under control and market forecasts for higher Fed rates were reasonable.
The Fed has raised its funds rate nine times since June 2004, bringing it to 3.25 percent and increasing the dollar's allure over the euro and the yen, which yield 2.0 percent and near zero percent.
Many in the market expect the Fed to raise rates to 4 percent by year-end.
Some also said the dollar could be vulnerable against the Japanese currency in the short term due to a big build-up in speculative short positions on the yen.
A build-up in speculative shorts, which are bets a currency will weaken, can often presage a turnaround when investors buy back that currency to cover their positions.