By James Ramage
The dollar rallied broadly on Tuesday, driven by a recent flurry
of upbeat economic data in the U.S. that's bolstered some
investors' confidence in the growth outlook.
The greenback soared to a nearly eight-year high against the
Japanese yen, a one-month high against the euro and a six-week high
against the Canadian dollar. The buck also rallied against many
emerging-market currencies, hitting its highest level against the
Brazilian real in nearly two months and against the Indonesian
rupiah since mid-March.
The dollar's strength carried over from Friday, when inflation
data for April underscored a pickup in growth and Federal Reserve
Chairwoman Janet Yellen said the central bank was on track to raise
short-term benchmark interest rates this year. Most U.S. financial
markets were closed on Monday for the Memorial Day holiday, and
currency trading was subdued.
On Tuesday, the release of data showing gains in business
investment, the housing market and consumer confidence added fuel
to the dollar's rally. Data from earlier in the year was also
revised higher.
"As you get better data, you're getting more people thinking
we'll see a recovery, which is good for the dollar," said Charles
St-Arnaud, economist and currencies strategist for Nomura
Securities.
Tuesday's sharp appreciation in the dollar is the latest big
swing to ruffle foreign-exchange markets. An eight-month dollar
rally sputtered in March when the Fed lowered its forecast for
growth and benchmark interest rates in the coming years after the
U.S. economy hit a soft patch. That sowed doubts among investors
who were betting that the Fed would strike a tightening stance
while other central banks pursued easing policies. Higher rates
make a currency more attractive for investors.
The dollar's rise sent ripples through commodity markets. Prices
of crude oil, gold, copper and grains tumbled on Tuesday, pushing
the S&P GSCI down 2% to a four-week low.
The greenback rallied to its biggest one-day gain against the
yen since Feb. 6, jumping to as high as JPY123.33, the highest
level since July 2007.
Against the euro, the dollar appreciated as much as 1%, climbing
to a one-month high of $1.0864. Some traders said worries that
Greece would default on its debt were exerting downward pressure on
the common currency.
The dollar's strength came against a selloff in U.S. stocks.
Some market watchers said that reflected concerns about higher
rates. "The data spooked investors a little bit," said James
Hosker, director of equities strategy in the Americas at Societe
Generale. "Equities investors don't want to see interest rates
climbing too quickly."
Recent gains in the buck are unlikely to propel the dollar to
the kinds of gains it saw in the second half of 2014 and the start
of 2015, said Axel Merk, chief investment officer of Merk
Investments, which has about $400 million under management. Traders
are still trying to gauge whether the U.S. economy is on sound
footing, so new data points bring on renewed volatility, Mr. Merk
said.
"I'm not buying that we have this resurgence right now," he
said. "I'm not sure the rally has too [much support]. Whenever the
dollar surges, people jump on that story. And as the dollar
weakens, people jump on that story, too.
"It won't be a clear shot upward here," Mr. Merk added. "I
expect some back and forth in the dollar's move."
Many still expect the dollar to appreciate against other
currencies, but hedge funds and other money managers have pared
bullish bets in the past two months, according to the U.S.
Commodity Futures Trading Commission. The net amount of investor
funds making bets in the futures market that the dollar would
strengthen declined 10% to $26 billion in the week ended May 19
from the previous week.
The Commerce Department on Tuesday reported disappointing
durable-goods orders, but currency traders looked past the headline
number to focus on a proxy for business investment, which rose for
the second month in a row in April. Orders for nondefense capital
goods, excluding aircraft, rose 1% in April, while the March
reading was revised up to 1.5% from 0.1%.
New-home sales in April rose by a bigger-than-expected 6.8% from
March to a seasonally adjusted annual rate of 517,000.
An index of U.S. consumer confidence rose more than expected in
April, and March's reading was also revised upward.