LONDON, Oct 18: The dollar sparkled on the foreign exchange market on Friday as Wall Street racked up fresh gains overnight and a cloud hung over the credibility of the euro-zone Stability and Growth Pact.

The single European currency traded close to one-month lows against the US unit, buying $0.9716 against 0.9708 late on Thursday in New York.

The dollar rose to 125.36 yen against 125.06 on Thursday, levels not seen in around four months.

Bank of America economist Callum Henderson said that the US unit was being buttressed by investors buying US stocks, spurred on by results from the likes of software behemoth Microsoft which cheered the market.

What we’ve seen in last 48 hours is hedge funds which were short of equities and to some extent long on bonds have started to cut back on those positions, he said.

As of Tuesday night we upped our weighting in equities to 70 per cent from 65 and we cut bonds to 20 from 25 and I believe some other houses did similarly this week, he told AFP.

Earlier in the week Germany admitted for the first time that its public deficit for this year was set to exceed a limit of 3.0 per cent of gross domestic product (GDP) agreed under the pact.

One thing’s for sure and that is that the maintenance of tight fiscal policy or some degree of tight fiscal policy against a backdrop of a slowdown and no easing from the ECB (European Central Bank) significantly hurts the economy, said Bank of America’s Henderson.

The market was also cautious ahead of the Irish referendum on the Nice treaty on EU enlargement at the weekend amid concern voters might reject the plans for a second time.

ABN Amro analysts said: Some see a No vote as euro positive because enlargement to include weaker economies risks draining already stretched euro area resources.

However, rejection would be another failure for EU policy making amid already embarrassing stability pact infringements, they wrote in a note to clients.

The euro was changing hands at $0.9716 against 0.9708 late on Thursday in New York, 121.78 yen (121.43), 0.6283 pounds (0.6260) and 1.4688 Swiss francs (1.4679).

The dollar was being quoted at 125.36 yen (125.06) and 1.5115 Swiss francs (1.5118).

The pound was at 1.5468 dollars (1.5499), 193.82 yen (193.95) and 2.3377 Swiss francs (2.3443).

On the London Bullion Market, the price of an ounce of gold stood at $310.95 against 310.75 late on Thursday. —AFP