December 24, 2013 / 3:36 AM / 4 years ago

Dollar drifts higher as U.S. economic outlook brightens

NEW YORK (Reuters) - The dollar edged higher on Tuesday in thin pre-holiday trade, after two days of losses, as increasing evidence of a solid U.S. economic recovery affirmed expectations the Federal Reserve will continue to scale back its monetary stimulus.

In the near term, the market will likely struggle to find fresh motivation ahead of year-end holidays. Most financial markets will be shut on Wednesday for Christmas Day and many will stay closed on Thursday.

On Wall Street, U.S. stock indexes ended at record highs in an early close while European stocks edged up, adding to the best run-in to Christmas since 1999, although trading in the shortened session was thin. <MKTS/GLOB>

U.S. Treasury yields, meanwhile, edged higher with benchmark 10-year notes trading just shy of 3.00 percent, reflecting an economy that could be finally clicking on all cylinders and boosting the dollar.

Data showed orders for long-lasting U.S. manufactured goods surged in November and a gauge of planned business spending on capital goods recorded its largest increase in nearly a year, pointing to sustained strength in the economy.

While another report showed new home sales slipped in November, sales in October were revised to show the highest pace in more than five years. In addition, house prices rebounded, underscoring the economy’s improving fundamentals.

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012. REUTERS/Kim Kyung-Hoon

“The signals of a rebounding economy continue with each new release of data,” said Sean Cotton, vice president and foreign exchange advisor at Bank of the West in San Ramon, California.

The U.S. durable goods data followed upbeat reports released the previous day showing consumer spending rose in November at the fastest pace since June. A survey also showed consumer sentiment hitting a five-month high heading into the end of the year.

In afternoon trading, the euro was down 0.2 percent at $1.3673. Against the yen, the common currency flat at 142.58 yen, but not far from a five-year high of 142.90 yen set last week.

The dollar gained 0.2 percent to 104.30 yen, just below a five-year high of 104.63 touched on Friday, while the dollar index .DXY was up 0.1 percent at 80.523.

Although the Fed has gone to great lengths to tell markets that tapering of its bond buying does not automatically lead to rate hikes, that has not stopped investors from speculating on the Fed’s eventual exit from a zero interest rate policy.

Markets are also now looking to see if the U.S. economy will be strong enough to allow the Fed to continue withdrawing support through 2014.

Meanwhile, worries about a cash crunch in China appeared to have taken a back seat after the central bank last week injected 300 billion yuan ($49.41 billion) into the money market. Traders, however, will no doubt be keeping a close eye on any fresh developments there at year-end.

Editing by G Crosse

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