Dollar drops as recovery hopes lift risk appetite

The dollar edged lower against major currencies on Friday, as a recent spate of upbeat U.S. data boosted expectations the global economy was reaching a bottom.

That has made investors comfortable buying higher-yielding currencies such as the Australian and New Zealand dollars as they pared back holdings of the safe-haven U.S. dollar.

"There's a bit of risk appetite with the S&P 500 bouncing off its 200-day moving average yesterday, and this has carried over to today," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "That's good news for the Aussie, Kiwi (New Zealand dollar), and Canada but bad news for the yen and U.S. dollar."

The positive outlook stemmed from Thursday's data showing the number of people staying on jobless benefits fell for the first time since January, while manufacturing in the U.S. Mid-Atlantic region shrank much less than expected in June.

Moves in the foreign-exchange market were limited, however, with investors awaiting a Federal Reserve policy meeting and economic data next week for more clues about the health of the global economy.

"The markets ... are in a holding pattern," said Gareth Sylvester, senior currency Strategist at HiFX in San Francisco. "There's no real consensus to drive the U.S. dollar fundamentally weaker or stronger. Overall, the market is still trying to second guess whether or not we're in a long-term bull market for equities."

In late New York trading, the euro was up 0.3 percent against the dollar at $1.3947 EUR=, after hitting a session peak of $1.4011, according to Reuters data.

The euro has lost momentum above $1.40, and analysts said the currency is still beset with Europe's economic outlook after the European Central Bank said this week that European banks may face another $283 billion in losses by the end of next year.

The dollar fell 0.4 percent to 96.22 yen JPY=, while the euro was down 0.1 percent at 134.21 yen EURJPY=R.

HIGHER-YIELDING CURRENCIES

Adding to recent optimism, International Monetary Fund First Deputy Managing Director John Lipsky on Friday pointed to signs the decline in global output has moderated and said the IMF is likely to revise up its 2010 economic growth forecasts.

Dollar Bounces Back Ahead Weekend

The U.S. unit found additional support on a decline in risk appetite that sent traders

from higher-yielding currencies, such as the euro, pound and Australian dollar.

This was also a function of profit-taking after the dollar declined to one-week lows a day earlier against the euro, U.K. pound, Swiss franc and Australian dollar.

Currency markets have been very volatile over the last week on conflicting signs of economic stabilization and fears over the U.S. Treasury auctions.

Comments reported Friday from Japanese Finance Minister Kaoru Yosano swung the pendulum in favor of the dollar.

Yosano said Japan, the world's second-largest foreign owner of Treasurys, would keep buying the securities, easing worries that foreign investors may turn their back on U.S. debt.

The dollar also found some buyers on a Wall Street Journal report suggesting the Federal Reserve is unlikely to expand its purchases of Treasurys and other assets at the June 23-24 policy meeting.

Friday afternoon in New York, the euro was at $1.3995, down from $1.4107 late Thursday. The dollar was at Y98.39, up from Y97.59, according to EBS. The euro was at Y137.75, up slightly from Y137.68, and the U.K. pound was at $1.6436, down from $1.6589. The dollar was at CHF1.0807, up from CHF1.0707 late Thursday.

Data out of Europe earlier Friday also weighed on the euro. It showed euro-zone industrial production slumped by the sharpest annual rate on record in April. The outcome was much weaker than anticipated, and the data suggested the recession is far from being over.

"As the global economic tide rises, some ships look in better shape than others," according to a research note from Barclays Capital. "Europe remains the laggard."

U.S. data Friday had little impact on currencies. U.S. import prices rose 1.3% in May, the biggest monthly rise since July 2008 and close to economists' expectations for a 1.5% increase. A Reuters/University of Michigan survey on consumer sentiment showed a modest rise in June from May.

Germany's deputy finance minister said foreign exchange won't be an issue at this weekend's Group of Eight meeting, but currency traders are nonetheless watching for any surprise announcements or comments by officials on the sidelines.