Dollar rally signals improving economy

THE dollar rose to a seven-day high against the euro in New York trading as signs the world’s biggest economy is strengthening lured investors to US assets such as stocks and corporate bonds.

Comments by President George W Bush, in which he said a weakening dollar is “contrary to our policy”, also boosted the dollar. The gains cut into a tumble that has driven the dollar down 20% against the euro in the past 12 months, which has bolstered US manufacturers and hurt European companies. A US industry group’s factory index, released yesterday, rose more in May than analysts forecast.

Evidence of an improving US economy is “in stark contrast to the numbers out of Europe”, said Robert Sinche, chief currency strategist at Citigroup Inc.

“`People may have bought the euro on expectations there was an intentionally weak dollar policy”' and they’re taking off those bets after Mr Bush’s comments, he said.

The dollar advanced to $1.1688 per euro at 10.05am in New York from $1.1784 Friday, leaving it up 1.7% from an all- time low of $1.1933 reached on May 27. Citigroup forecasts a rebound in the dollar to $1.13 per euro in three months.

US manufacturing gained strength in May, suggesting the worst may be over for businesses that cut output during the Iraq war, an industry report showed.

US stocks surged after the report, driving up the Standard & Poor’s 500 Index 1.1% from an 11-month high reached Friday.

Mr Bush stated twice in recent days that he favours a stronger dollar, leading some analysts to conclude the administration wants to slow the currency’s 10-month slide on concern that it may deter international investors from buying US bonds and drive up interest rates. Foreigners own 38% of the $3.3 trillion of Treasury securities outstanding.

“Bush affirmed very clearly that he wants a strong dollar,” Italian Prime Minister Silvio Berlusconi said at a meeting in France of the Group of Eight leading industrialised nations.

Lehman Brothers Holdings Inc. yesterday raised its forecast for US gross domestic product to 3.5% for the third and fourth quarters, from prior projections of 3% and 3.2%.

The dollar may rally about 12% by late this year against a basket of six currencies of major US trading partners, it said.

A quarter of the 36 traders, analysts and investors in Asia, London and New York surveyed by Bloomberg News on Friday recommended selling euro for dollars, up from 13% the previous week.

German Chancellor Gerhard Schroeder told Moscow-based Kommersant newspaper that “if the euro’s rapid gains continue, it will threaten the economy of Germany” Europe’s largest.

The euro also fell as an industry report showed European manufacturing shrank for a third month in May. An index based on a survey of purchasing managers at about 2,500 companies in the euro region by Henley-on-Thames, England-based NTC Research for Reuters Group Plc fell to the lowest since January 2002. A figure below 50 indicates contraction.