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US dollar gains, cheered by falling oil, sterling

NEW YORK - The U.S. dollar on Friday recovered from the previous day's losses, buoyed by a pullback in oil prices, stock market gains and an ailing pound after growth data strongly suggested a recession in Britain.

Oil lost ground after soaring nearly 5 percent on Thursday. It last traded below $120 per barrel CLc1, down more than 2 percent on the day, easing inflation pressures and aiding the dollar.

Comments from influential investor Warren Buffett on Friday, who said in an interview that he has no bets against the dollar, further bolstered sentiment on the currency and fueled a rally in U.S. stocks. For the full story, see [ID:nN22379030].

"The dollar is getting a knee-jerk reaction to the fact that we're getting a bit of a push-up in equities. Oil and gold have also come off and helped the dollar," said Tom Fitzpatrick, global head of FX strategy at CitiFX in New York.

"The FX market continues to trade closely with commodities."

In midday New York trading, the euro EUR was down 0.7 percent at $1.4794, edging toward a six-month low hit earlier this week at $1.4631, according to Reuters data.

Despite Friday's losses, the euro was on track for its best weekly gain versus the dollar since mid-July.

Earlier, the dollar briefly trimmed gains versus the euro after Federal Reserve Chairman Ben Bernanke, who spoke at an annual Fed symposium in Jackson Hole, Wyoming, said a stable dollar and falling commodities should help slow inflation this year and next. [ID:nN22434443].

His remarks prompted analysts to reduce expectations of a U.S. interest rate increase this year, which could diminish the dollar's appeal to investors.

Bernanke fails to halt dollar rally

"(Bernanke's) expectations that inflation will ease again suggest no urgency to remove accommodation ... (and this) plays into the notion that the Fed is on hold for the foreseeable future," said Brian Dolan, chief currency strategist, at Forex.com in Bedminster, New Jersey. "His positive comments on the dollar aside, the rate implications of his remarks are dollar-negative."

Still, the Fed chairman's comments failed to stall the dollar's advance. The dollar rose 1.4 percent to 109.85 yen JPY, inching back toward a nearly eight-month high of 110.66 yen touched a week ago.

The greenback was on pace for its best one-day gain against the yen in more than two months at current prices.

Losses in sterling also helped the dollar regain its footing. The pound fell sharply after the UK economy posted its weakest performance since the recession of the early 1990s.

The poor UK growth numbers added to an overall bleak picture of a slowing European economy, increasing the possibility of European Central Bank and Bank of England monetary easing.

Sterling slid 1.4 percent to $1.8523 GBP. The pound's losses helped fuel a 0.9 percent gain in the dollar versus a basket of major currencies .DXY to 76.695, not far from its 2008 peak at 77.413 hit early this week.

The dollar has soared this month as dealers have unwound trades that bet on the global economy weathering the U.S. downturn and the credit crisis. Investors, as a result, sold the euro, British pound, Australian dollar and commodities.

Analysts said the dollar had been overdue for a reversal of its sharp gains anyway, but it was still on track for a medium-term recovery after a seven-year downtrend.

But they cautioned against possible steep pullbacks in the dollar given persistent problems at U.S. mortgage agencies Fannie Mae FNM.N, Freddie Mac FRE.N and investment bank Lehman Brothers LEH.N.

"(The Fannie and Freddie) situation is particularly crucial for the U.S. economy because it could exacerbate the housing market problems," wrote Danske Bank in a research note.

It added that if concerns about both agencies' capital levels are not addressed, "this would ... dilute the effect of the Fed's substantial easing of monetary policy earlier this year and emphasize the problems involved in getting monetary policy to make a difference where it really counts."