(Updates prices, adds quote)
By Steven C. Johnson
NEW YORK, April 15 (Reuters) - The dollar edged higher on
Tuesday after surprisingly strong inflation and manufacturing
data suggested the Federal Reserve may not continue cutting
U.S. interest rates quite so aggressively.
A separate Treasury report that showed foreigners increased
purchases of dollar-denominated assets in February eased fears
that the credit crisis would dry up U.S. capital inflows.
Taken together, the data "knocked the wind out of dollar
bears" who have been casting about for a reason to push the
euro toward an all-time high around $1.60, said Bank of New
York Mellon currency strategist Michael Woolfolk.
The euro last traded down 0.3 percent at $1.5802 <EUR=>,
having retreated from an overnight peak of $1.5875. Last week,
it rose to $1.5912, the highest level since its 1999 launch.
Against the yen, the dollar traded at 101.35 yen <JPY=>,
off a session peak of 101.68 yen but still up 0.25 percent.
The dollar shed 10.5 percent versus the euro last year and
is more than 8 percent weaker in 2008, a slide driven by a Fed
that has cut benchmark interest rates by 3 percentage points
since the onset of a housing-led credit crunch in August.
Worries about the U.S. economy, which many fear may already
be in recession, and more banking sector losses have markets
expecting another rate cut this month, though analysts are
betting on a modest quarter-point cut to 2 percent <FEDWATCH>.
Labor Department data on Tuesday showing U.S. producer
prices advanced by a more-than-expected 1.1 percent in March
bolstered that view.
While non-energy, non-food prices rose just 0.2 percent as
expected, some fear a weak dollar, high commodity costs and
sharp Fed rate cuts could cause inflation to spill over into
the broader economy.
"I guess with the PPI, the report will remove expectations
that the Fed will cut 50 basis points at the next meeting even
though the the U.S. economy is slowing down," said Ron Simpson,
director of FX research at Action Economics in Tampa, Florida.
Boris Schlossberg, senior currency strategist at
DailyFX.com in New York, said a surprise rise in the New York
Fed's regional manufacturing survey in March also helped, as it
suggests a weaker dollar is aiding exports.
STILL DODGY FOR THE DOLLAR
Despite its intraday gains, though, analysts said markets
remain wary of buying dollars, as fears of a sharper U.S.
economic slowdown and more banking losses keep global investors
skittish about betting to heavily on the greenback.
European monetary policy-makers' continued focus on
inflation threats also helped limit euro losses.
Unlike the Fed, the European Central Bank has held
benchmark rates at 4 percent for more than a year, and
officials have shown little appetite for near-term cuts.
After a speech Monday in New York, ECB President
Jean-Claude Trichet said inflation "certainly remains a
problem" and said "a solid anchoring of inflation expectations
is of the essence."
For now, foreign dollar demand appears to be holding up,
though. The U.S. Treasury's latest TICS report, which tracks
capital flows into and out of the United States, showed that
overseas investors in February were net buyers of long-term
U.S. assets to the tune of $72.5 billion.
That beat the prior month's $57.1 billion inflow and was
enough to cover the month's $62.3 billion trade deficit.
Analysts said the data suggests recent distress in funding
markets has yet to weaken foreign appetite for U.S. assets.
"The fact that there weren't big outflows during the
period, from a sentiment perspective, helps the dollar avoid a
potential negative," said Bob Lynch, head of North America FX
strategy at HSBC Bank USA in New York.
(Additional reporting by Gertrude Chavez-Dreyfuss and Lucia
Mutikani; Editing by Andrea Ricci)
