Dollar Trades Near 10-Week High as Economic Outlook Improves

Dec. 17 (Bloomberg) -- The dollar traded near a 10-week high against the euro after the Federal Reserve said deterioration in the labor market is “abating,” stoking optimism about the outlook for the U.S. economy.

The greenback rose against 12 of its 16 major counterparts before reports forecast to show U.S. initial jobless claims slowed and a gauge of the outlook for the world’s largest economy rose. The Fed said the economy is strengthening and most of its special liquidity facilities will expire on Feb. 1, 2010.

“An improvement of the labor market enhances confidence in the U.S. economy,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “The dollar will fare well.”

The dollar was at $1.4525 per euro at 9:59 a.m. in Tokyo from $1.4531 in New York yesterday. It climbed on Dec. 15 to $1.4504, the highest level since Oct. 2. The dollar traded at 89.95 yen from 89.78 yesterday when it advanced to 89.99, the strongest level since Dec. 7. The euro bought 130.64 yen from 130.46.

U.S. initial jobless claims fell to 465,000 last week from 474,000 in the week ended Dec. 5, according to a Bloomberg News survey before the report is released today.

Leading Indicators

The Conference Board’s index of U.S. leading indicators, a gauge of the outlook for the next three to six months, rose 0.7 percent in November, following a 0.3 percent gain in the previous month, according to a separate Bloomberg survey before the release of the indicator today.

“Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in its policy statement yesterday after meeting in Washington. “Businesses are still cutting back on fixed investment” and “remain reluctant to add to payrolls.” Deterioration in the labor market is “abating.”

Policy makers held the target rate for overnight lending between banks at zero to 0.25 percent, a decision forecast by all 98 economists in a Bloomberg survey.

“There’s some acknowledgement of improved economic conditions including the labor market,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “We still think there’s a signal that informs the market there will be some Fed balance sheet shrinkage coming through in 2010,” a supportive factor for the dollar, he said.

Bullish on Dollar

The dollar has appreciated 4 percent against the euro from this year’s weakest level of $1.5144 on Nov. 25 as government figures showed the unemployment rate fell last month to 10 percent and retail sales rose more than forecast. Before the payrolls report on Dec. 4, the greenback had fallen from the 2009 peak reached in March as investors bought higher-yielding assets funded with dollars.

Investors turned bullish on the dollar for the first time since March as the U.S. economy showed evidence of a sustained recovery, a survey of Bloomberg users indicated.

Sentiment toward the dollar rose to 51.99 in December, according to the survey. The measure is a diffusion index, meaning a reading above 50 indicates Bloomberg users expect the dollar to strengthen. The reading was last above 50 in March, when it reached 53.41.

“With the key driving force gradually shifting toward interest-rate differentials from risk sentiment, good economic data may begin to support the dollar more directly,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo.