Dollar Declines to Lowest Since November on Wagers Fed Will Lag Behind ECB

The dollar fell to its lowest level since November against the currencies of six U.S. trade partners on bets the European Central Bank will be more aggressive than the Federal Reserve about controlling inflation.

The euro rose against the dollar on speculation ECB President Jean-Claude Trichet may indicate this week a readiness to increase borrowing costs while Fed Chairman Ben S. Bernanke may signal economic stimulus will continue. Sweden’s krona climbed to a 30-month high after Riksbank Governor Stefan Ingves said interest rates may be raised at every meeting this year.

“The big driver for the euro has been short-term interest- rate differentials, which had moved against the dollar,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “Since the beginning of the year it’s been pretty much a one-way trend.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against six currencies, decreased as much as 0.7 percent to 76.756, the lowest level since Nov. 9, before trading at 76.893 at 5 p.m. in New York, down 0.5 percent. The gauge, which is weighted 57.6 percent on euro movements, fell 1.1 percent in February.

The shared currency strengthened 0.4 percent to $1.3806, from $1.3754 on Feb. 25, after earlier gaining as much as 0.7 percent. The 17-nation currency pared gains against the dollar after the close of London trading.

Euro’s 2011 Gain

The euro has risen 1.3 percent this year, while the dollar has lost 2.2 percent, according to Bloomberg Correlation- Weighted Currency Indexes, which track the currencies of 10 developed nations. The dollar dropped today to the lowest level since August 2008 versus the other nine.

The ECB, which has kept its key interest rate at 1 percent since May 2009, will hold its next policy meeting on March 3. An ECB governing council member, Mario Draghi, said on Feb. 26 that inflation pressures are forcing policy makers to focus more closely on the timing of future interest-rate increases.

“Inflation seems to be the No. 1 concern on everybody’s mind,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit.

Bernanke is scheduled to deliver the Fed’s semiannual report on monetary policy tomorrow to the Senate Banking Committee and is due to testify to the House Financial Services Committee the following day. The Fed has kept its benchmark rate at zero to 0.25 percent since December 2008 and is buying $600 billion in Treasuries through June to help spur the economy.

New York Fed President William Dudley said today the “considerably brighter” economic outlook isn’t yet reason for the central bank to withdraw its record monetary stimulus. He spoke in a speech in New York.

Preferred Measure

U.S. consumer spending rose less than forecast in January, 0.2 percent, Commerce Department data showed. The Fed’s preferred measure of prices, which excludes food and fuel, increased 0.1 percent from December and was up 0.8 percent from a year earlier.

Another report showed European inflation stayed above the ECB’s 2 percent target for a second month in January.

“The latest inflation numbers coming out of Europe, coupled with potentially hawkish comments from Trichet, have supported the euro,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co. “Currencies will be volatile this week trading off rhetoric.”

The euro was up for the first time in three days against the Swiss franc, gaining 0.4 percent to 1.2823, and rose 0.5 percent to 112.91 yen. Japan’s currency slipped 0.1 percent to 81.78 per dollar.

Krona Climbs

The Swedish krona appreciated as much as 2.1 percent to 6.2916 versus the dollar, the strongest level since August 2008, on the outlook for higher interest rates. It traded at 6.3271.

There’s “an increased probability that the repo rate will be raised at all of the monetary policy meetings held this year,” Ingves said in the minutes of the central bank’s Feb. 14 meeting, published today. The Riksbank raised its benchmark repo rate this month for a fifth time since July, to 1.5 percent.

“The Riksbank comments are pretty critical and if you think that’s reflective of what the ECB and Bank of England would say and do, you’ve got to be pricing in more hawkishness on that side of the Atlantic than this side,” said Greg Anderson, a currency strategist at Citigroup Inc. in New York.

The Swedish currency has climbed 4.5 percent this year, according to Bloomberg’s correlation-weighted indexes.

39-Month High

Canada’s dollar reached its strongest level against its U.S. counterpart since November 2007 after a government report showed the nation’s economy grew at a 3.3 percent annual pace in the fourth quarter, more than economists forecast.

The currency rallied 3 percent for the month. The Bank of Canada, which has expressed concern that its strength may stall growth, meets tomorrow.

The Canadian dollar appreciated 0.6 percent to 97.18 cents per U.S. dollar, from 97.74 on Feb. 25. It touched 97.10 cents.

South Africa’s rand rose against most major currencies, reaching its strongest level in six weeks versus the greenback. South African Finance Minister Pravin Gordhan said on Feb. 23 “rapid” weakening may fuel inflation in Africa’s largest economy. In October he said the currency was “overvalued.”

The rand advanced 0.8 percent to 6.9665 per dollar, extending its advance this month to 3.1 percent. It reached 6.9352, the strongest level since Jan. 19

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.