NEW YORK (AFX) -- The dollar weakened against its major rivals Wednesday as growing concerns over the U.S. ability to finance its widening deficit outweighed a stronger-than-expected manufacturing report.
Capital flows into the U.S. rose to $66.0 billion in January as private investors increased their purchases of U.S. equities, the Treasury Department said. The trade deficit rose 5.3% to a new record of $68.5 billion in that month.
'The number is not good for the dollar,' said Ashraf Laidi, chief currency analyst at MG Financial Group. 'This was the second straight month in which net capital flows into the US fall below the trade deficit...There is increased difficulty for the U.S. to finance its swelling trade deficit.'
In late New York trading, the euro rose to $1.2073, the highest level since March 7, before paring gains to trade at $1.2067, up 0.4% from late Tuesday. The dollar changed hands at 117.35 yen, down 0.3%. The dollar weakened 0.5% to 1.2956 Swiss francs.
'The weakness of the dollar today is a continuation of what we've seen in the last several days,' said Marc Chandler, head of global currency strategy at Brown Brothers Harriman Inc. 'We expect continued [dollar/euro] range trading.'
Waning interest in Treasuries
The dollar sold off after the Treasury International Capital System (TICS) report showed diminished foreign demand for U.S. Treasuries.
Foreigners bought a net $4.4 billion in US Treasury bonds, down from $18.3 billion in December.
Private foreign investors sold $4 billion in Treasuries in January, after buying fewer Treasuries in December.
Michael Woolfolk, senior currency strategist at the Bank of New York, pointed out that for the second consecutive month, the shortfall in the January TICS was concentrated in US Treasuries. ?
'This can no longer be viewed as a one-off event associated with the year-end,' he said.
Japan holdings of Treasuries fell to $668.3 billion in January from $684.9 billion in December. Chinese investors held $262.6 billion in Treasuries in January, up from $256.7 billion they held in December.
Upbeat manufacturing data
Earlier, the dollar strengthened briefly on a better-than-expected reading of manufacturing activity in the New York area.
The New York Federal Reserve Bank said its Empire State Manufacturing index unexpectedly rose to 31.2 in March from 21.0 in February. Economists were expecting the index to slip to 18.5 from the initial estimate last month of 20.3.
Separately, U.S. import prices fell 0.5% in February as prices for petroleum and natural gas declined, the Labor Department said. Economists were expecting import prices to fall 0.4% in February.
In its periodic Beige Book report on economic conditions, the Fed said 'economic activity continued to expand in January and February.' The Fed found little had changed from the 'moderate' growth rate in place since the beginning of the year. Inflation pressures were muted in the past six weeks, the report said.
The announcement 'left little to get excited about as far as the Fed changing the current policies,' said Joel Ward, manager of the Joel Nathan ForexFund. 'Businesses experienced moderate hiring and labor costs remained unchanged. This suggests that the Fed still looks to extend the interest rates to at least 5% with further increases subject a change in future data.'
The financial market is expecting the Fed to lift rates to 4.75% later this month. The Federal Reserve has hiked rates 14 times in a row to the current 4.5%.
Sterling, yuan
Elsewhere, the British pound recovered early weakness following a worse-than-expected jobless claims reading out of U.K. At last check, sterling was at $1.7479, up 0.07%.
February jobless claims in Britain rose 14,600 to 919,700 in March. The monthly increase was the largest since 1992. The unemployment rate over the last three months rose 0.1 percentage points to 5%.
Overnight, the Chinese yuan saw its sharpest daily rise since the nation dropped its decade-old dollar/yuan peg last July. The gain came after Chinese premier Wen Jiabao said the market will play a greater role in determining exchange rates.
On Tuesday, Wen ruled out any additional sudden yuan revaluation. 'There will be no more surprises,' he said. This story was supplied by MarketWatch. For further information see www.marketwatch.com.