The dollar rallied against most key currencies Friday in thin, choppy trading, bouncing back from early weakness to hit a three-week high vs. the Japanese yen and a two-week high vs. the German mark.
Money traders attributed the advance to growing perceptions that the U.S. economy could strengthen later this year, resilient belief that the government could coordinate an international action to bolster the dollar, and technical influences that forced many to purchase dollars.The volume of trading was light, exaggerating movements in foreign exchange values, but traders said the dollar's advance was significant and suggested a possible shift in underlying sentiment about the anemic U.S. currency.
"We're closing on a very positive note for the end of the week," said Paul Alley, assistant vice president at the foreign exchange desk of the Long-Term Credit Bank of Japan's New York branch. Still, he said, "this whole thing could disappear Monday. If there's no follow-through buying, this was an aberration."
By 4:30 p.m. EDT the dollar fetched 84.20 yen in New York, up from 83.70 Thursday and its highest level since April 6. The dollar also was changing hands at 1.3869 marks, up from 1.3780 Thursday and the highest since April 13. The dollar traded as high as 1.3950 marks before settling back.
The dollar initially weakened on a government report that the U.S. economy's growth rate fell to 2.8 percent in the first three months of the year, the weakest since the summer of 1993. But dollar buyers emerged and the currency zigzagged higher throughout the rest of the day.
Traders said other evidence such as higher consumer confidence and stronger employment supports the view that the economy is still surprisingly vibrant, which helps the dollar. In addition, a report Friday from the Purchasing Management Association of Chicago, a barometer of broader trends, suggested strong economic growth in April. That was an additional reason to buy dollars.
"We've overdone the view that the U.S. economy is weakening," said John Rothfield, a currency market analyst at the Chicago office of NationsBank.
Stronger growth could induce the Federal Reserve to raise interest rates, which it has done seven times since February 1994. Higher rates would make dollar-denominated investments more attractive and raise demand for dollars.
The dollar was helped further Friday by traders who had sold the dollar short, or bet the dollar would fall. When the dollar began rising instead they had to buy dollars to minimize their losses, which created a big runup in the dollar's value late in the day.