Dollar close to 1-week low against euro

Category: Market News

LONDON (AFX - London 1612 GMT London 1324 GMT) - The dollar weakened to levels not seen in nearly a week, dented by news of benign inflationary pressures in the US which weighed on the chances of a rate hike over the coming months.

The euro nudged up over half a cent after the afternoon’s data, to levels in the mid-1.28 usd area.

The much awaited US CPI data came in below expectations, with the core rate dropping to 0.2 pct in July from 0.3 pct in June. The headline CPI rate, meanwhile, rose by 0.4 pct in line with expectations.

‘Today’s consumer price report prompted some dollar selling as players increased odds that Bernanke will remain on pause through the end of the year,’ said Michael Woolfolk at Bank of New York.

‘With the Fed on hold in a data-dependent mode, today’s report took on greater significance than usual,’ he added.

The dollar’s falls accelerated when it was also revealed that the property market in the US is faltering. The twin factors of softer inflation and slowing growth are likely to persuade US rate setters to keep monetary policy unchanged.

Today’s figures were key as the jury is still out on whether US rate setters will resume hiking interest rates. The Fed’s run of 17 rate hikes came to an end last week with the benchmark rate at 5.25 pct. The door remains open to one more rate hike, however.

‘Bond prices moved higher on the results and the dollar weakened on the thought that the data do not support any near-term increase in the Fed funds rate,’ said Michael Carey at CALYON.

‘We maintain our view that the Fed is finished tightening rates this year and that core measures of inflation will begin to moderate later this year as the economy grows below potential,’ he added.

Today’s figures come on the heels of soft producer price figures yesterday and all the signs now appear to point in the same direction — that US interest rates are unlikely to rise any time soon.

Elsewhere, the pound came back after an initial dip on the back of news that the Bank of England decision to hike interest rates earlier this month was not unanimous and that jobless levels in the country have risen.

Partly offsetting the impact on the early drop, however, was the fact that wage pressures were up slightly.

John Butler, an economist at HSBC, said the rate-setting panel appears to be on a tightening bias, although near term hikes to curb inflation could eventually be replaced by rate cuts to support growth.

Many observers predict another quarter point hike in November, taking the benchmark rate to 5.00 pct.

Talking about the day’s labour market report, Nick Verdi at Barclays Capital said the Bank of England will be worried about

the pick up in wages.

‘Today’s firmer-than-expected earnings data will mean that the Monetary Policy Committee will remain vigilant to the danger that higher inflation could feed through into wages in the near term,’ he said.

‘That is likely to be more of a concern than the threat that higher unemployment will feed through into lower wage growth further down the line,’ he added.