The dollar probed resistance levels below the 1.46 level in European trading on Friday, but the US currency was unable to sustain the gains and weakened back to 1.4660 later in New York trading. The dollar is still gaining some support from defensive demand on a reduction of carry trades, but this is battling to overcome a fundamental lack of confidence in the currency.
The latest capital account data recorded net long-term inflows of US$26.4bn for September after a revised negative outflow of US$70.6bn for the previous month. Total capital flows were, however, negative for the second consecutive month. Although there were flows into US stocks and bonds, the data will reinforce underlying fears over weaker US asset demand.
The industrial production data was weaker than expected with a 0.5% output decline for October with falls registered across all major sectors. The capacity use rate also fell which will increase fears that the industrial sector is under pressure.
Fed officials took a generally firm stance on Friday with Governors Kroszner and Poole both downplaying the potential for further interest rate cuts unless there is evidence of further deterioration. Markets will remain unconvinced unless the data flow starts to show signs of improvement and will continue to price in further rate cuts which will reinforce the dollarâ€™s lack of yield support.