FOREX-Dollar advances with US capacity use at 5-yr highBy Kevin Plumberg

NEW YORK, Jan 17 (Reuters) - The dollar climbed on Tuesday, after a report showed U.S. industrial capacity use running at its highest rate in five years, bolstering the case for further Federal Reserve interest rate increases.

Some investors were forced to cover their bets against the U.S. currency after data showed activity at factories, utilities and mines were running at 80.7 percent of full capacity in December from 80.3 percent in November, indicating slack in the economy is narrowing and potential inflation pressures increasing.

"That's something that the Fed has signaled it is looking at right now with resources getting stretched in the economy," said Jay Bryson, global economist with Wachovia Corp in Charlotte, North Carolina.

"So all things being equal, this is another reason for the Fed to keep tightening. All that is consistent with a stronger dollar," he said.

The euro slipped 0.4 percent from late Monday to $1.2064 . However, it has remained in a narrow range of around $1.2000 to $1.2180 for the past two weeks.

The dollar was up around 0.9 percent to 115.87 yen after initially failing to hurdle the psychologically important 116 yen.

The euro jumped 0.5 percent to 139.92 yen after triggering a layer of automatic buy euros orders around 139.50 yen, traders said.

A sell-off in Japanese equities during the Tokyo trading day and higher oil prices contributed to yen weakness, traders said.

The Nikkei share average <.N225> lost 2.8 percent, its largest single-day decline since April 2005, while the Mothers index <.MTHR> for start-up companies fell almost 12 percent after prosecutors raided a well-known Internet firm on Monday.

BOTTLENECKS AND RATES

The capacity utilization data suggests the Fed may have to extend its 18-month interest rate raising campaign that has so far taken rates to 4.25 percent, economists said.

The prospect for higher U.S. rates relative to other large, industrialized economies boosted the dollar last year, partly because it heightened the allure of dollar-denominated deposits.

"Historically, capacity utilization over the 81 level could bring some production bottlenecks into play throughout the economy which could put upward pressure on prices," said Ron Simpson, managing director of global currency analysis with Action Economics in Dobbs Ferry, New York.

U.S. interest rates still offer a better return compared with 2.25 percent in the euro zone and virtually zero in Japan.

Sterling was down a third of a percent against the dollar at $1.7625 after briefly dipping below $1.76, sliding on data that showed UK consumer price inflation falling back to the Bank of England's 2.0 percent target in December.

While the figures matched economists' forecasts, traders said on-target inflation left open the door to a UK interest rate cut this year.

Earlier in the session, a report from the New York Fed showed regional U.S. manufacturing growth slowed slightly in January but only due to a pullback in inventories. The employment and average work week components both jumped, suggesting inflationary pressures continue to build.

The Fed is widely expected to raise rates for the 14th consecutive time on Jan. 31 but the central bank has said the future path of monetary policy will depend on incoming economic data.

Wednesday's December core inflation data, which is expected to match November's 0.2 percent increase, will undoubtedly draw attention for its impact on expectations for where U.S. interest rates are headed. (Additional reporting by John Parry)

Forex - US dollar mixed in Sydney morning

Forex - US dollar mixed in Sydney morning, payrolls point to end of rate hikes
01.08.2006, 06:57 PM

SYDNEY (AFX) - The US dollar was trading mixed against the major currency pairs, while selling pressure continued after key payrolls data increased expectations US rate hikes are nearing an end, dealers said. They said the US dollar was sold heavily in overnight trading on Friday as the December non-farm payrolls data was well below the market consensus. However, upward revisions to November's data limited part of the selling. 'Sentiment towards the US dollar remains very negative after Friday's non-farm payrolls report served to maintain expectations that a peak in US official interest rates is near,' National Australia Bank currency strategists said in a market note. 'This dynamic has been driving the US dollar lower at the start of a new year as the speculative community starts to build a net short position,' they said.

At 10:26 am in Sydney (2326 GMT) the euro was firmer at 1.2146 usd from 1.2145 in late New York trading on Friday while the dollar was higher at 114.52 yen from 114.40. Commonwealth Bank market economists said, in a market note, the euro rose to 1.2174 usd from 1.2082 in New York trading following the US payrolls data, while US dollar/yen slumped to a low of 114.22 yen from 116.28. The US non-farm payrolls data for December rose by just 108,000, well short of market expectations of a 200,000 employment increase.

Dealers said the impact of the December outcome was softened from an upward revision of 90,000 to the November non-farm payrolls, while the October data was revised down by 19,000. They said the overall revisions resulted in a total non-farm payrolls growth in 2005 of 2.02 mln compared to total payrolls growth of 2.194 mln in 2004. The NAB currency strategists said given the November revisions, the payrolls data over the past couple of months will see the US Federal Reserve increase cash rates by 25 basis points to 4.50 pct on Jan 31. 'But the odds of a March rate hike remain around 50 pct. If December's outcome is repeated in coming months and we see a slowing in job growth, the Federal Reserve might be done by the time Ben Bernanke takes over,' they said.

Dealers said Federal Reserve Bank of Boston president Cathy Minehan outlined the Federal funds rate is near the bottom end of the neutral rate range, but future decisions will depend on incoming economic data ahead. Also released in the US on Friday were average hourly wages for December, which rose 0.3 pct from a 0.1 pct increase in November, raising the annual rate of wages growth to 3.1 pct which is the biggest increase since 2002.

They said the unemployment rate for December eased to 4.9 pct from 5.0 in November, below the market consensus of a flat outcome. Dealers said the markets will focus on Friday's release of key retail sales and producer price index data for December due on Friday. They added US trade deficit data on Thursday could attract extra attention from traders, with US dollar bears arguing that a peak in interest rates will refocus attention on the record US external deficit. In the euro zone the economic group's unemployment rate for November remained at 8.3 pct and was in-line with market expectations. Dealers said the European Central Bank and Bank of England both meet on Thursday, with no change to official interest rates expected.

They said a market survey on Friday of traders, strategists and investors showed 44 pct recommend selling the US dollar against the euro, up from 28 pct in the previous survey conducted in the prior week. The NAB currency strategists said the euro's strength from the weak US headline payrolls data was lackluster, with 1.2156 usd capping its gain. However, the yen 'was the standout performer on Friday, crashing through option barriers at 115.50 yen on its way to 114.50,' they said. Dealers said the yen is likely to be contained within a tight trading range today due to a national holiday in Japan.