TOKYO, Dec 17 - The dollar hovered near record lows against the euro on Wednesday after surprisingly subdued U.S. inflation data endorsed the market's view that the U.S. Federal Reserve will keep interest rates low. The spectre of low U.S. rates has prompted global investors to invest in higher-yielding currencies, limiting fund inflows into the United States, something the world's largest economy desperately needs to finance its gaping current account deficit. "There's nothing to buffer the dollar against issues like the current account deficit, so it's probably going to continue to fall," said Tohru Sasaki, chief forex strategist at JP Morgan Chase. The third quarter current account gap shrank more than economists had expected to $135.0 billion in the third quarter from an upwardly revised $139.4 billion in the second quarter.
However, it remained at about five percent of U.S. gross domestic product, a level many deem as unhealthy. U.S. consumer prices in November, also unveiled on Tuesday, dipped 0.2 percent after coming in flat in October. The so-called core rate, which strips out volatile food and energy prices, slipped 0.1 percent -- its first decline since December 1982. As of 0602 GMT, the euro hovered around $1.2322 , little changed from late U.S. levels. It was about 0.3 percent below its record high of $1.2363 set in London trade on Tuesday. The dollar was also steady around 107.48 yen . The British pound clung near an 11-year peak of $1.7558 set in New York trade, changing hands around $1.7537 . Sterling received a boost from an announcement earlier in the week by the Royal Institution of Chartered Surveyors that house prices continued to rise strongly last month. The dollar failed to take advantage of other data released on Tuesday that suggested the U.S. economy was stronger than most analysts had thought.
U.S. industrial production was up 0.9 percent last month, the biggest gain in four years. Housing starts unexpectedly jumped 4.5 percent to an annual rate of 2.070 million units in November, the fastest pace since February 1984. "What the data shows is that industrial production is increasing while inflation remains benign, which is a plus for the U.S. economy, but not necessarily for the dollar," said Naomi Fink, senior currency analyst at BNP Paribas.
FURTHER YEN RISE?
Meanwhile, traders welcomed comments regarding the yen's recent strength made by Japan's central bank chief on Tuesday. Bank of Japan Governor Toshihiko Fukui said that while the bank was watching the rising currency's effects on corporate profits, a stronger yen may not necessarily be damaging. Said Fink: "It goes along with the perception of continuing recovery in Japan, and that Japanese officials are likely to tolerate a stronger yen as long as it's measured and comes in tandem with improved profitability." Many market players said that while Japanese authorities would continue to intervene in the market, the possibility of the yen eventually rising to the 105-yen level -- or even the 100-yen level -- was not out of the question. "Intervention could curb the yen's rise, but it isn't going to stop it at this stage. Considering the way things are going right now, (such levels are) certainly a possibility," JP Morgan's Sasaki said.//