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NEW YORK (Dow Jones)--The dollar strengthened against the euro after worse-than-expected U.S. consumer sentiment data released Friday morning, but then reversed those gains and settled back into recent trading ranges as investors focused on interest rate differentials.
Because of record-high unemployment, the U.S. consumer remains a weak link in the global economic recovery, leading investors to pin their hopes on continued loose U.S. monetary policy that fuels bets in riskier assets. This is turn weighs on the dollar, analysts said.
In morning trading, the euro was at $1.4850 from $1.4841 late Thursday, according to EBS via CQG. The dollar was at Y89.69 from Y90.40, while the euro was at Y133.20 from Y134.15. The U.K. pound was at $1.6645 from $1.6581. The dollar was at CHF1.0165 from CHF1.0180.
The Dollar Index, which compares the greenback's moves against a trade-weighted basket of six currencies, was at 75.529 from 75.686.
Worsening economic conditions typically benefit the dollar, with investors flocking to the safe-haven greenback and abandoning assets considered riskier, but after digesting Friday's consumer sentiment numbers, investors concentrated more on U.S. interest rates that are likely to remain ultra-low as the economy remains challenged, said John McCarthy, manager of currency trading at ING Capital Markets in New York.
Those ultra-low interest rates put pressure on the dollar, causing yield-seeking investors to abandon the buck to get higher returns in the euro and other better-performing assets.
U.S. stocks also remained higher despite the worse-than-expected data. In recent trading patterns, gaining stocks prop the euro and other higher-yielding currencies.
"Equity markets look at weak dollar and like it, and dollar weakness fuels equity gains," McCarthy said. "Nothing seems to change that," he said.
As long as stocks stay positive, the euro should remain supported against the dollar, perhaps extending toward $1.49 in a day of light and choppy trading, McCarthy said.
The Reuters/University of Michigan consumer sentiment index came in at 66.0 for mid-November; analysts had expected a reading of 71, compared with 70.6 at the end of October.
The data show the U.S. consumer, constricted by 26-year high unemployment, still remains pinched as other aspects of the economy crawl toward recovery. A fits-and-starts recovery means the Federal Reserve will likely keep key U.S. interest rates at ultra-low levels, which weigh on the dollar.
Earlier, the dollar had weakened against most of its major rivals after the release of data that showed a widening gap between the U.S. and its trading partners.
In a knee-jerk reaction, investors sold the dollar to intraday lows against its major rivals.
Backward-looking trade data are not typically a prime driver of currencies, but the combination of rising imbalances and extremely low key interest rates bodes poorly for the dollar, analysts said.
Overnight, the euro strengthened slightly against the dollar as data showed an expansion in euro-zone economic activity, leading to improved investor sentiment about the pace of a global economic recovery.
The third-quarter gross domestic product missed expectations by a touch, keeping the euro's gains tempered, but it bested second-quarter numbers, which had shown a contraction in euro-zone GDP.
Meanwhile, the head of the International Monetary Fund, Dominique Strauss-Kahn, said the dollar had been "incredibly resilient" during the recent financial crisis and that its recent fall has been within a normal range.
The declining dollar, which is trading near 15-month lows, has been a topic of discussion at this week's Asia-Pacific Economic Cooperation forum annual summit in Singapore. The Chinese yuan, which in practice is informally linked to the U.S. currency, has also been a constant theme of this week's APEC meetings that culminate this weekend with a summit of the 21 nations' leaders.
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