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Cautious optimism over a US recovery should lessen the risk of heavy dollar losses in the short term

The dollar weakened following firmer than expected Euro-zone growth data on Thursday and was also unsettled by a renewed increase in oil and commodity prices. The US growth-orientated data was mixed, but the forward-looking data was marginally positive. Industrial production fell by 0.7% in April after a revised 0.2% increase the previous month and capacity use also declined.

The New York manufacturing index edged lower to -3.2 in May from +0.6 the previous month, although this followed a strong rebound previously. Jobless claims were little changed at 371,000 in the latest week while the NAHB housing index remained weak. The Philadelphia Fed index improved to -15.6 in May from -24.9 previously and there was a strong rebound in the six-month outlook for the second month running which will fuel expectations of an economic rebound.

Long-term capital inflows to the US remained firm in March at US$80.4bn from US$63.6bn the previous month with firmer equity inflows, although overall flows were negative for the month due to an outflow of shorter-term capital.

The housing data will be watched closely on Friday and another slide in starts would provide a stern test of increased optimism over the US economy while any increase could trigger a substantial positive jolt.

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