From Bloomberg News
The U.S. currency strengthened to $1.2063 per euro at 9:36 a.m. in New York from $1.2127 late yesterday. The dollar climbed to 115.46 yen from 114.96. U.S. markets were closed yesterday.
Manufacturing in New York state expanded in January, a Fed report showed today. The Fed Bank of New York's general business conditions index was 20.1 this month, compared with a revised 26.3 in December. Readings greater than zero signal growth. This month's reading was above the 15.6 average for 2005.
A separate Fed report showed industrial production rose more than analysts forecast. Output at U.S. factories, mines and utilities climbed 0.6 percent, after a revised 0.8 percent gain in November. Economists expected a 0.5 percent advance, based on the median estimate in a Bloomberg News survey.
These reports ``provide a relatively good backdrop for the dollar,'' said Daniel Katzive, a currency strategist with UBS AG in Stamford, Connecticut. They will keep traders from being ``too hasty from concluding with certainty that the Fed is done with its tightening after the January meeting,'' he said.
The Fed raised its key rate to 4.25 percent last month, and all 31 economists in a Bloomberg survey forecast another increase at the end of this month. The European Central Bank held its key rate steady last week after lifting it in December for the first time in five years to 2.25 percent. The Bank of Japan has kept rates near zero percent since 2001.
``The market is assuming another rate hike and these numbers will probably endorse that,'' said Tim Fox, a currency strategist at Dresdner Kleinwort Wasserstein in London. ``There's going to be one more rate hike, maybe even two.'
The euro weakened after a government report showed inflation in Germany, Europe's largest economy, eased to 2.1 percent in December, the lowest annual rate since August, compared with 2.3 percent the previous month.
The yen earlier gained against the dollar on speculation yesterday's 0.7 percent drop wasn't justified by prospects for improved growth in the world's second-biggest economy.
Japan's households became less pessimistic in the fourth quarter, lifting a confidence index to a 14 1/2-year high, the Cabinet Office said in Tokyo. The yen had its biggest decline versus the U.S. currency in almost three weeks yesterday.
``It's a positive background for the yen, and investors are coming back in after a large move yesterday,'' said Jeremy Stretch, a currency strategist at Rabobank Groep in London. ``The economic recovery looks pretty durable and we'll be seeing the end of deflation soon.''
The yen may extend gains on speculation Bank of Japan Governor Toshihiko Fukui may indicate the central bank is closer to ending its zero-interest rate policy when it meets later this week.