Dollar gains after better-than-expected US data

05/28/2008

LONDON (AFP) - The dollar recovered some lost ground against the euro Wednesday after much better-than-expected US durable goods data offset the impact of higher German inflation, dealers said.

They said the euro had firmed up earlier in the day after a spike in German inflation figures suggested that the European Central Bank will keep its interest rates at least on hold for some time to combat rising prices.

That worked in favour of the euro until early afternoon when US durable goods orders showed a much smaller-than-expected drop of 0.5 percent in April, taken to mean that the troubled US economy still has life in it despite the subprime home loan crisis.

"This was a decent report and seems to indicate that the economy has far from collapsed," said Joel Naroff of Naroff Economic Advisors.

The data are volatile however and the dollar's gains were modest.

In late European trade, the euro was at 1.5628 dollars, down from 1.5715 dollars early in the day and 1.5686 dollars in New York late on Tuesday.

Against the Japanese currency, the dollar firmed to 104.72 yen from 104.24.

German inflation accelerated sharply in May, adding to worries about Europe's largest economy and further dashing hopes of a cut in eurozone interest rates.

According to an official projection based on data from six of Germany's 16 states, consumer prices rose 3.0 percent year-on-year, up from 2.4 percent in April and well above the ECB's target of just below 2.0 percent.

The main culprits were rising energy and food prices.

"The latest CPI data ... highlights that the risk ... remains skewed to the topside," said Matthew Foster-Smith at IFR Markets.

For the eurozone as a whole, analysts expect May inflation to accelerate again to an annual 3.6 percent from 3.3 percent last month, partly as a result of higher energy prices. That would match the March figure, which was the highest since the euro was created.

"This is all pointing towards the ECB having to continue with its hawkish stance to keep inflationary pressures in check, and although this may be bad news for consumers, the accompanying strong yields on euro deposits should leave the currency looking upbeat," said James Hughes, analyst at CMC Markets.

The ECB has left its key short-term interest rate unchanged at 4.0 percent since June 2007 to focus on keeping prices under control.

Benedikt Germanue at UBS said said the dollar was buoyed by slightly receding fears about the price of oil but the near-term outlook for the unit remains mixed.

"Falling oil prices may not necessarily lead to a stronger dollar and any resumption (in the uptrend) ... would again stoke inflation fears, pressuring the dollar," he said.

Oil prices began picking up later in the day, moving back towards 130 dollars.

In London trade late Wednesday, the euro changed hands at 1.5628 dollars against 1.5686 late on Tuesday, 163.66 yen (163.53), 0.7892 pounds (0.7936) and 1.6227 Swiss francs (1.6218).

The dollar stood at 104.72 yen (104.24) and 1.0387 Swiss francs (1.0337).

The pound was at 1.9806 dollars (1.9763).

On the London Bullion Market, the price of gold fell to 902.50 dollars per ounce at the fixing from 906.75 dollars late on Tuesday.