Dollar gains on US inflation news, Irish 'no' vote
Sunday, 15 June 2008
NEW YORK, June 14 (AFP): The dollar gained against the euro and other currencies yesterday as a government report showed a surge in US inflation and as the euro was dented by Ireland's rejection of the Lisbon Treaty.
The euro fell to 1.5384 dollars at 2100 GMT compared with 1.5435 dollars in New York late Thursday.
Against the Japanese currency, the dollar advanced to 108.15 yen from 107.91.
The dollar picked up momentum in the wake of the inflation report as traders said it raised the odds that the Federal Reserve would raise interest rates.
US consumer prices jumped by a more-than- expected 0.6 per cent in May, largely as energy costs soared, according to a Labor Department survey.
Economists said they were not surprised that energy costs leapt higher but said the report could cause some angst at the Fed as it suggests inflationary pressures are building.
Core consumer price inflation (CPI), which excludes volatile food and energy prices, gained 0.2 per cent during May, consistent with market forecasts.
"The figures are likely to fundamentally confirm dollar bulls on the backdrop of widespread inflation fears in the market," said analysts at Commerzbank.
Michael Woolfolk at Bank of New York Mellon said the relatively tame core inflation reading provided no reason to be complacent about upside risks to inflation.
"Rather, it provides the Federal Reserve with a reason to act sooner rather than later in order to get ahead of rising inflationary expectations in an attempt to head it off," he said.
The Fed had slashed its key base rate in recent months to 2.0 per cent amid flagging economic growth. The decline in rates and moderating economic growth has weighed down the dollar.
The euro meanwhile came under pressure after the Irish rejected the European Union's Treaty of Lisbon in a referendum.
The Irish rejection threatens to scupper the EU's political integration process, as all 27 member states need to ratify the treaty for it to take effect.
And a political crisis in the eurozone could also spell trouble for its economic policy.
Geoffrey Yu, currency analyst at UBS, said: "It will be damaging for the euro as eurozone leaders have warned economic integration cannot be optimised without political integration."
Attention was also focusing on the two-day meeting of finance ministers from the Group of Eight industrialized nations in Osaka, Japan, that opened Friday, with markets keen to see whether the group will back US efforts to strengthen the dollar.
Recent talk from Treasury Secretary Henry Paulson and Fed rate-setters has suggested that Washington is determined to see the dollar appreciate to bring import price inflation under control.
But analysts are doubtful that ministers will go as far as to sanction intervention in the currency markets.
In late New York trade, the dollar stood at 1.0460 Swiss francs, up from 1.0416 Thursday.
The pound was at 1.9481 dollars, down from 1.9465 a day earlier.
Meanwhile, The dollar rose the most against the euro since 2005 as Federal Reserve Chairman Ben S Bernanke said economic risks have faded, raising speculation policy makers will increase borrowing costs this year to contain inflation.
The greenback rose to a one-month high this week as Treasury Secretary Henry Paulson declined to rule out intervention to support the dollar and US retail sales increased in May twice as much as economists forecast. Group of Eight finance ministers meeting this weekend in Japan may signal that they favor a stronger US currency.
"Risks to US growth have been reduced, and the market is now thinking the Fed will hike in August," said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co. in New York. "That's a big shift, and the effect on the dollar was positive."
The dollar increased 2.5 per cent to $1.5380 per euro, from $1.5778 on June 6. It touched $1.5303, the strongest level since May 8. The US currency rose 3 per cent to 108.19 against the yen, from 104.93, and touched 108.38, the highest since Feb. 14. It was the biggest gain since December 2004. Japan's currency fell for a fifth consecutive week against the euro, decreasing 0.6 per cent to 166.35, from 165.64. It's the longest stretch of gains since October.
"We've seen a very sharp reversal of sentiment about the dollar," said Nick Bennenbroek, head of currency research at Wells Fargo & Co. in New York. "The US economy seems reasonably resilient, and the Fed is beginning to look hawkish."
The Chinese yuan rose for a second consecutive week versus the dollar, increasing 0.3 per cent to 6.9022, on speculation policy makers are seeking a stronger currency to control inflation. The US wants China to keep allowing its currency to rise against the dollar and will discuss that stance in talks next week in Maryland, said Alan Holmer, the US Treasury's top China negotiator, in a briefing in Washington yesterday.
The Australian dollar fell 2.6 per cent this week against its US counterpart, the biggest decline in almost three months, and the New Zealand currency declined 2.4 per cent, for its third consecutive weekly decrease. Traders speculated an increase in US interest rates would narrow the yield advantage of Australian and New Zealand debt.
Fed funds futures on the Chicago Board of Trade show a 60 per cent chance the US central bank will increase the 2 per cent target lending rate by at least a quarter-per centage point at its August meeting, compared with 9 per cent odds a week ago. There are 21 per cent odds policy makers will lift the rate to 3 per cent by December.
The yield advantage of a two-year German bund over a comparable Treasury note fell to 1.58 per centage points, making dollar-denominated assets more attractive. The difference was 2.26 per centage points on June 6, the widest since 1993.
The euro fell to 1.5384 dollars at 2100 GMT compared with 1.5435 dollars in New York late Thursday.
Against the Japanese currency, the dollar advanced to 108.15 yen from 107.91.
The dollar picked up momentum in the wake of the inflation report as traders said it raised the odds that the Federal Reserve would raise interest rates.
US consumer prices jumped by a more-than- expected 0.6 per cent in May, largely as energy costs soared, according to a Labor Department survey.
Economists said they were not surprised that energy costs leapt higher but said the report could cause some angst at the Fed as it suggests inflationary pressures are building.
Core consumer price inflation (CPI), which excludes volatile food and energy prices, gained 0.2 per cent during May, consistent with market forecasts.
"The figures are likely to fundamentally confirm dollar bulls on the backdrop of widespread inflation fears in the market," said analysts at Commerzbank.
Michael Woolfolk at Bank of New York Mellon said the relatively tame core inflation reading provided no reason to be complacent about upside risks to inflation.
"Rather, it provides the Federal Reserve with a reason to act sooner rather than later in order to get ahead of rising inflationary expectations in an attempt to head it off," he said.
The Fed had slashed its key base rate in recent months to 2.0 per cent amid flagging economic growth. The decline in rates and moderating economic growth has weighed down the dollar.
The euro meanwhile came under pressure after the Irish rejected the European Union's Treaty of Lisbon in a referendum.
The Irish rejection threatens to scupper the EU's political integration process, as all 27 member states need to ratify the treaty for it to take effect.
And a political crisis in the eurozone could also spell trouble for its economic policy.
Geoffrey Yu, currency analyst at UBS, said: "It will be damaging for the euro as eurozone leaders have warned economic integration cannot be optimised without political integration."
Attention was also focusing on the two-day meeting of finance ministers from the Group of Eight industrialized nations in Osaka, Japan, that opened Friday, with markets keen to see whether the group will back US efforts to strengthen the dollar.
Recent talk from Treasury Secretary Henry Paulson and Fed rate-setters has suggested that Washington is determined to see the dollar appreciate to bring import price inflation under control.
But analysts are doubtful that ministers will go as far as to sanction intervention in the currency markets.
In late New York trade, the dollar stood at 1.0460 Swiss francs, up from 1.0416 Thursday.
The pound was at 1.9481 dollars, down from 1.9465 a day earlier.
Meanwhile, The dollar rose the most against the euro since 2005 as Federal Reserve Chairman Ben S Bernanke said economic risks have faded, raising speculation policy makers will increase borrowing costs this year to contain inflation.
The greenback rose to a one-month high this week as Treasury Secretary Henry Paulson declined to rule out intervention to support the dollar and US retail sales increased in May twice as much as economists forecast. Group of Eight finance ministers meeting this weekend in Japan may signal that they favor a stronger US currency.
"Risks to US growth have been reduced, and the market is now thinking the Fed will hike in August," said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co. in New York. "That's a big shift, and the effect on the dollar was positive."
The dollar increased 2.5 per cent to $1.5380 per euro, from $1.5778 on June 6. It touched $1.5303, the strongest level since May 8. The US currency rose 3 per cent to 108.19 against the yen, from 104.93, and touched 108.38, the highest since Feb. 14. It was the biggest gain since December 2004. Japan's currency fell for a fifth consecutive week against the euro, decreasing 0.6 per cent to 166.35, from 165.64. It's the longest stretch of gains since October.
"We've seen a very sharp reversal of sentiment about the dollar," said Nick Bennenbroek, head of currency research at Wells Fargo & Co. in New York. "The US economy seems reasonably resilient, and the Fed is beginning to look hawkish."
The Chinese yuan rose for a second consecutive week versus the dollar, increasing 0.3 per cent to 6.9022, on speculation policy makers are seeking a stronger currency to control inflation. The US wants China to keep allowing its currency to rise against the dollar and will discuss that stance in talks next week in Maryland, said Alan Holmer, the US Treasury's top China negotiator, in a briefing in Washington yesterday.
The Australian dollar fell 2.6 per cent this week against its US counterpart, the biggest decline in almost three months, and the New Zealand currency declined 2.4 per cent, for its third consecutive weekly decrease. Traders speculated an increase in US interest rates would narrow the yield advantage of Australian and New Zealand debt.
Fed funds futures on the Chicago Board of Trade show a 60 per cent chance the US central bank will increase the 2 per cent target lending rate by at least a quarter-per centage point at its August meeting, compared with 9 per cent odds a week ago. There are 21 per cent odds policy makers will lift the rate to 3 per cent by December.
The yield advantage of a two-year German bund over a comparable Treasury note fell to 1.58 per centage points, making dollar-denominated assets more attractive. The difference was 2.26 per centage points on June 6, the widest since 1993.