US economy buoyant as dollar passes 110 barrier

The dollar hit its highest level against the yen for two-and-a-half years yesterday, passing the psychological barrier of 110 as the Federal Reserve began a two-day policy meeting.

Even though most analysts do not think the Fed's open market committee will raise US interest rates after the meeting ends today, the strength of the economy means the next move is likely to be an increase.

Further evidence of the buoyancy of the American economy was provided yesterday by a surge in new house sales to the highest level since April 1986. They jumped 7.5 per cent in May, following a 5.9 per cent increase in April.

In addition, the index of leading indicators rose 0.3 per cent in May. This was the fourth increase running in the index, which is meant to signal the strength of activity during the next six months.

However, Fed officials have been signalling that it is too early to be alarmed about the resurgence in growth, as inflation remains firmly under control. Most of Wall Street therefore expects the increase in interest rates to be postponed, possibly until after November's presidential election.

The Bank of Japan's quarterly meeting gave the US currency a further boost, ending yesterday with a signal that Japanese interest rates would not yet climb from their all-time low.

Bank of Japan Governor, Yasuo Matsushita, said: ''The recovery needs to gain further momentum and spread wider to become self-sustaining."

Traders said nerves about the outcome of today's second round of voting in the Russian elections was also helping to strengthen the dollar.

A minority of City economists believe there is a chance that the Chancellor Kenneth Clarke will reduce British base rates by a further quarter point after this morning's meeting with Eddie George, governor of the Bank of England.

Although it is only a month since the last cut, by a quarter point to 5.75 per cent, evidence that the economy is gathering pace could make it harder to justify another reduction in the autumn.

"The Chancellor has got the bit between his teeth," said Geoffrey Dicks, UK economist at NatWest Markets.

The pound, nevertheless,strengthened alongside the dollar yesterday in London and it rose by more than half-a-pfennig to end at DM2.3762.

According to market rumour, there has been a lot of speculative buying of the pound in recent weeks. However, Bronwyn Curtis, an economist at Deutsche Morgan Grenfell, said there was also a genuine switch by investors in favour of sterling.

The currency moves follow the weekend's communique from the Group of Seven finance ministers, describing recent exchange rate developments as "positive and promising". It said exchange rate misalignments were "detrimental to trade and growth".

This left the currency markets puzzling over whether the ministers sought a further climb in the dollar's value against the yen.

The dollar has gained nearly 2 per cent against the Japanese currency in the past month, and is 36 per cent above its April 1995 record low of 80.63.

The dollar ended at 110.39 in New York, up from the previous day's 109.68. The Dow Jones index closed 9.6 points lower at 5720.38.

Comment, page 17

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future