* U.S. manufacturing, housing data disappoint investors
* Yield gap between U.S. and German bonds lower over week
* Yen rebounds after Tuesday's losses
By Laurence Fletcher
LONDON, Feb 19 The euro touched a seven-week
high against the dollar on Wednesday, with the greenback
struggling in the wake of more soft economic data and news that
foreign investors had been heavy sellers of U.S. assets.
The euro rose as high as $1.37735 during Asian
trading, its strongest level since January 2, and was last
trading flat at $1.3757, with equity markets offering investors
Tuesday's New York manufacturing and U.S. housing data were
the latest numbers out of the United States to disappoint
investors, increasing pressure on the dollar.
The numbers bolstered the case for the Federal Reserve to be
patient in its tapering of its huge bond-buying programme, ahead
of Wednesday's release of minutes from its January policy
meeting when it opted to trim asset buying by another $10
The data also pushed Treasury yields lower, with the yield
spread between 2-year Treasuries and German 2-year
bunds down over the past week, offering less support to the
Against a basket of major currencies, the dollar index
fell as low as 79.927, its lowest level this year, before
recovering to trade down 0.1 percent on the day at 79.966.
"It (the weak U.S. data) is certainly in the background.
There's been a period of nearly three weeks where U.S. data has
come in pretty consistently below expectations," said Simon
Smith, FxPro's head of research.
"It's not as obvious as previously that saying the Fed would
taper quantitative easing ... is decidedly dollar bullish."
EQUITY FLOW GAP
Perhaps even more telling for the long run, Treasury figures
showed overseas investors had sold almost $120 billion of U.S.
assets in December.
Alan Ruskin, global head of G10 currency strategy at
Deutsche Bank in New York, noted that the net outflow from U.S.
equities over 2013 has amounted to a huge $214 billion.
In contrast, the euro zone attracted inflows into stocks of
111 billion euros. At the same time, the euro zone enjoyed a
record current account surplus of 216 billion euros in 2013,
while the United States ran up a deficit of almost $400 billion.
"That the euro was the strongest major currency in 2013 is
easily - with all the benefit of hindsight - explained by this
current account and equity flow gap," Ruskin said.
"For USD strength to broaden and also encompass the euro, a
turn in the 'equity gap' is one precondition."
The yen rebounded from Tuesday's falls, which were prompted
by the Bank of Japan's decision to extend and expand a scheme to
promote bank lending.
The dollar was 0.2 percent lower against the Japanese
currency at 102.16 yen, with options expiries at the
101.50 and 102 yen levels, said one London-based trader.
Betting on dollar-yen was one of the biggest hedge fund
trades for the start of 2014, and with the dollar having
finished last year at 105.275 yen the trade is now showing
The euro was also down 0.2 percent at 140.55 yen.
Dealers are also keeping a close eye on China's central bank
after it drained funds from the money market on Tuesday.
The People's Bank of China (PBOC) is trying to engineer a
gradual upward shift in the cost of money to encourage companies
to deleverage and discourage high-risk shadow banking activity.
Investors are anxious in case the tightening goes too far
and hurts economic growth, concerns that have periodically put
pressure on currencies across the Asian region.
The Australian dollar, whose economy is closely linked to
China's, was a tad lower at $0.9021 after recent gains.