20000220Dollar triumphs despite Wall Street selloff

NEW YORK: The dollar rose to five-month peaks against the yen and edged up against the euro on Friday after fresh US data lifted confidence that robust growth will continue despite the threat of higher interest rates.

Tame US inflation data and news of a narrower trade deficit burnished the dollar's luster a day after Federal Reserve Chairman Alan Greenspan said more rate hikes lie ahead to restrain the red-hot US economic expansion.

While analysts said the Fed chief was surprisingly blunt about the need for tighter monetary policy in his twice-yearly testimony to Congress, many believe rate hikes will be gradual, allowing the Fed to engineer a soft landing for the economy.

"It's been a relatively good week for the dollar," said Jim McCormick, currency strategist at J.P. Morgan.

"The trade balance was clearly much lower than expected. The overall inflation picture continues to be one of a gradual increase. And the message from Greenspan seems to be that there are plenty of rate hikes in the pipeline but it is going to continue to be a very gradualist approach," he said.

Building on gains this week as Japan's economic outlook darkened, the dollar JPY breached the 111 yen mark for the first time since Sept 9 after the US government released its consumer price report for January and trade data for December.

The dollar climbed as high as 111.26 yen, a rise of some 2 percent on the week, before profit-takers pulled the dollar back near 111 yen in afternoon trading.

The dollar also wrestled the euro EUR to the 98 cent area, nearly a full cent from its overnight highs, before slipping back to the middle of this week's range near 98.50 cents as blue-chip US stocks headed sharply lower.

The greenback's gains came after the Labour Department said the Consumer Price Index, its broadest inflation gauge, rose a weaker-than-expected 0.2 percent in January, the same pace as in December and slightly below expectations.

The core CPI, stripped of volatile food and energy components, also rose 0.2 percent, in line with consensus Wall Street forecasts. The report followed subdued wholesale inflation data on Thursday.

The Commerce Department said the international trade gap, traditionally an important indicator for currency markets, widened to an astounding $271.31 billion in 1999, but traders zeroed in on a narrower figure for December.

The trade deficit dipped to $25.55 billion in December from a revised record $27.1 billion in November. The December gap was smaller than the $26.4 billion economists had forecast.

While wide US trade deficits usually pressure the dollar as Americans send more currency overseas for imports than they receive from export sales, the greenback has remained largely unscathed as foreigners pour money into US capital markets.

And a series of US interest rate hikes since last year, which Wall Street expects will continue, has not sufficiently rattled US equity markets to prompt an exodus of dollars.

Fed Board Governor Edward Kelley said on Friday there is no end it sight to the current US economic expansion, which is probably growing at an unsustainable pace.

Kelley added the Fed was focused on the labour market as an indicator of overheating in the economy and expressed concern about the United States' widening current account deficit.

Despite the threat of higher interest rates and a possible selloff on US asset markets, confidence in America remains high as its economy continues to outperform Europe and Japan.

"The (US) economy is still firm, and even if it slows down on a relative basis, it will still be dramatically outperforming Japan," said David Solin, partner at Foreign Exchange Analytics.

The outlook for Japan and the yen looked even shakier overnight after Economic Planning Minister Taichi Sakaiya said he was not sure Japan could hit the government's modest 0.6 percent growth target this year.-Reuters