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NEW YORK - The dollar fell to a one-month low against the yen today, one of its biggest daily falls since June 2006, after US data showed the first monthly net outflow from US capital markets in nearly two years.
The greenback fell against the euro also, but recovered some ground after Federal Reserve Chairman Ben Bernanke told Congress that the economy may be stronger than some believe.
A a surprise decline in US industrial output last month and a sharp slide in US mid-Atlantic region manufacturing activity also kept overall sentiment on the dollar negative.
"The dollar could be vulnerable to further losses in the immediate future" after Thursday's round of negative data, said Omer Esiner, senior market analyst at Ruesch International in Washington.
In recent trade, the dollar fell more than 1 per cent from late Wednesday to a one-month low of 119.37 yen , according to Reuters data.
The euro, which earlier hit a six-week high at US$1.3172 after the capital flows data, eased back to around US$1.3140 after Bernanke's remarks, up some 0.1 per cent.
The market was particularly caught off guard by the US Treasury Department report showing a net US outflow of US$11 billion in December, not nearly enough to finance that month's trade deficit.
The dollar has been propped up in recent years by strong demand for US Treasuries, especially in Asia, where the US trade deficit is most pronounced.
The capital inflow report is closely watched for its impact on the dollar, particularly because the United States needs to attract some US$2 billion a day in foreign investment to plug its current account deficit.
Analysts said the latest data raises a red flag about the US ability to continue financing its large current account deficit, the broadest measure of trade and other inflows.
That helped boost the yen, which was already higher overnight after a report showed Japan's economy advanced at a 4.8 per cent annualized pace in the fourth quarter.
Traders said that sparked investors to unwind carry trades that had bet on a further yen decline.
"The unwinding of yen carry trades could be very scary, as it could happen very quickly," said Dixon Fung, a trader at MG Financial in New York.
Low Japanese interest rates have pushed investors to borrow yen cheaply, sell it for higher-yielding currencies and profit on the spread, a strategy that keeps the yen under pressure.
But some analysts focused on Bernanke's remarks on Thursday that the US economy may be stronger than some people think.
The Fed chief had sparked a dollar sell-off during his first round of semi-annual testimony on Wednesday when he said inflation was showing signs of diminishing, sparking concern that the Fed may have to cut interest rates later this year.
"The tone has turned a bit more bearish toward the dollar, but given some of the bad news we've had today, the dollar's managing to hold its own," said David Powell, currency analyst at IDEAglobal in New York.
Even Bernanke's relatively benign outlook on inflation "certainly was not a sign that the US economy is melting down," he said, adding the euro could slip back below US$1.31 in the near term if it fails to close above US$1.3150 today.
- REUTERS