NEW YORK (MarketWatch) — The U.S. dollar pared gains on Monday after economic reports gave a muddy picture of the U.S. economic outlook, continuing the debate of what and how much action the Federal Reserve will take to support growth.
Also, concerns about the Bank of England easing more and the European Central Bank not tightening so soon supported the greenback.
The second day of gains stemmed from traders reducing bets against the greenback and taking profits on positions after a long run lower for the U.S. currency against the euro, Australian dollar and Canadian dollar.
The dollar index (DXY 77.08, +0.04, +0.06%) , a measure of the U.S. unit against a basket of major global currencies, rose to 77.083 from 77.038 late Friday. It rose to 77.645 earlier.
Last week, the index fell to its lowest level since December.
The euro (EURUSD 1.3958, -0.0016, -0.1145%) stood at $1.3961, compared to $1.3964 in late North American trading Friday. It had fallen to $1.3829.
U.S. industrial production unexpectedly slipped in September, adding to evidence that the U.S. Federal Reserve will attempt to boost the U.S. economy by easing monetary policy through a bond-buying program. Such quantitative easing is akin to printing money and devalues a country’s currency, and has put the dollar under pressure for weeks. Read about industrial production.
“Profit-taking continues to help the dollar recover despite weaker economic data that validates the need for additional stimulus,” said Kathy Lien, director of currency Research for GFT.
Home builder confidence in October rose for the first time in five months, according to the National Association of Home Builders/Wells Fargo housing market index. The gain surprised some economists. See story on builders confidence.
Investors appeared somewhat disappointed in remarks at by Federal Reserve Chairman Ben Bernanke on Friday. He said there was a case for “further action” by the Fed, but he offered few details on the potential size or timing of additional asset purchases. Markets have dubbed the new quantitative easing program QE2.
“The markets are going to struggle with an expectation versus reality scenario on the Fed’s QE2 program,” said Andrew Busch, global currency strategist at BMO Capital Markets.
While the Fed is still widely expected to announce an easing program at its next meeting on Nov. 2-3, the outlook is not so clear for the European Central Bank.
Over the weekend, ECB President Jean-Claude Trichet rejected a call by Bundesbank President Axel Weber, a member of the ECB Governing Council, to bring the central bank’s bond-buying program to a close.
“No! This is not the position of the Governing Council, with an overwhelming majority,” Trichet said in an interview with the Italian daily newspaper La Stampa, according to an English transcript of the interview on the European Central Bank’s Web site. Read the transcript.
Japanese yen, British pound,
The dollar was back under pressure against the Japanese yen (USDYEN 81.1400, -0.2500, -0.3071%) , however, slipping to 81.23 yen from ¥81.49 on Friday. Last week, the greenback slumped to the weakest in 15 years, below ¥81.
The Australian dollar (AUDUSD 0.9905, +0.0001, +0.0101%) was unable to build on its push above parity versus the U.S. dollar last week, changing hands at 99.06 U.S. cents, up from 98.83 cents late Friday.
The U.S. dollar also rose 0.5% versus the Canadian dollar (USDCAD 1.0150, +0.0028, +0.2766%) , to buy C$1.0156.
The British pound (GBPUSD 1.5892, -0.0091, -0.5694%) fell 0.5% to $1.5908. The euro rose 0.4% versus the pound to buy 87.81 pence.
Kenneth Broux, senior market economist at Lloyds TSB, said there may be room for further upside for the dollar over the remainder of October into the November midterm U.S. elections, he wrote in a research note.
Broux said the dollar could advance on the British pound in particular if minutes of the October policy meeting of the Bank of England prove “particularly dovish,” indicating the central bank is leaning toward resuming its own quantitative-easing program in coming weeks.
