Tuesday, January 17, 2006


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)