Dollar catches breath after Fed-inspired surge

The dollar steadied today after surging in yesterday's session when minutes of the Federal Reserve's latest meeting suggested…

The dollar steadied today after surging in yesterday's session when minutes of the Federal Reserve's latest meeting suggested the central bank might step up the pace of interest rate rises.

The dollar notched up its biggest one-day rise against the euro and the yen since mid-2004 on Tuesday as the combination of hawkish minutes and upbeat US data prompted a scramble to close bets on further dollar weakness.

Data released yesterday showed the value of new US factory orders climbed a larger-than-expected 1.2 per cent in November, the fastest pace in four months.

"The market is ignoring the United States' structural problems and focusing on the positive cyclical story," said Adam Myers, currency strategist at Societe Generale.

READ MORE

"Strong U.S. data and the minutes suggest the Fed may be more aggressive in raising interest rates than the market had thought."

The dollar stood at $1.3275 per euro and 104.48 yen this morning, little changed on the day and just short of earlier three-week peaks.

The dollar has gained about 2 per cent against the euro and yen since the start of the year, recovering from a sharp sell-off in the final days of 2004 when it fell to a series of record lows against the euro.

Some analysts said the Fed's renewed commitment to raise interest rates could provide some salvation for the dollar, which has been battered by concerns about the U.S. current account and trade deficits.

The dollar is expected to gain from rising interest rates as more international investors are lured by returns on dollar deposits.

The US monthly payrolls report, due on Friday, is expected to show that 175,000 new jobs were created in December.

A strong jobs number would raise hopes for a sustainable US recovery and reinforce market expectations of further rises in US interest rates.

Economic releases from the euro zone, meanwhile, continue to suggest relatively sluggish growth.

Data earlier showed growth in the euro zone's dominant service sector held steady in December, as weak consumer demand and high energy prices prevented any improvement from November's 15-month low.