Dollar Weakens as Inflation Data Back Fed Stance

Japanese Yen
The Japanese currency. Photographer: Tomohiro Ohsumi/Bloomberg

The dollar weakened against most of its major peers after U.S. inflation data fueled speculation Federal Reserve policy makers will maintain economic stimulus.

The U.S. currency fell against the 17-nation euro as a gauge of consumer prices excluding food and energy rose less than forecast. Norway’s krone advanced with crude oil even as the central bank warned this week the currency may weaken. The yen headed for its sixth weekly drop against the dollar. The pound rallied as 10-year gilts yields were poised for the biggest weekly advance in more than three years.

“We’re seeing a correction in the dollar today as yields wilt a little bit on disappointing CPI data and little bit weaker consumer confidence,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “The krone is becoming the ultimate oil-growth play and they are concerned about the unnatural strength.”

The dollar fell 0.7 percent to $1.3175 per euro at 5 p.m. New York time, losing 0.4 percent this week. The U.S. currency declined 0.2 percent to 83.43 yen, paring a 1.2 percent weekly increase.

Yen Tumble

The yen has dropped 5.6 percent in the past month, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. Australia’s dollar has fallen 1.3 percent in that time, the second-worst performance.

Norway’s krone rose 0.9 percent to 5.7296 per dollar even as central bank Governor Oeystein Olsen said investors should be aware that the krone may weaken and that it’s a riskier investment than the Swiss franc.

“At some point there is a risk for investors that the krone weakens,” Olsen said in an interview in Oslo today. “We still have some room for maneuver in the interest-rate policy in both directions,” he said. “We have no certain level of the krone that we steer toward.”

Olsen sent the krone down to a five-week low against the euro this week when he cut the bank’s benchmark deposit rate to target the currency. The bank has stepped up its efforts to contain the commodity-backed krone’s ascent after it touched a nine-year high this month.

Golden Cross

Australia’s dollar may rise to 90 yen in one month after the 20-day moving average rose above the 200-day average, creating a golden-cross formation, said Research Institute Ltd.

The currency rose 0.4 percent to 88.35 yen and advanced 0.6 percent to $1.0590.

The U.S. consumer-price index climbed 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News, the Labor Department reported today in Washington. The core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than projected.

“This confirms the Fed’s view that inflation remains subdued and may alter investor’s perceptions about the possibility of further accommodation from the Fed in the next few months,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “The month-over-month CPI print was enough of a miss to shake out some of the short-term dollar longs in the market.” A long position is a bet that an asset will increase in value.

Dollar Measure

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.5 percent to 79.778.

Futures traders decreased their long dollar positions in the week ended March 13. The difference in the number of wagers by hedge funds and other large speculators on an appreciation in the dollar compared with those on a drop -- so-called net longs -- was 12,770, compared with net longs of 21,521 a week earlier. The gauge measures the dollar against the yen, euro, Swiss franc, pound, Mexican peso and the Australian, Canadian and New Zealand dollars.

The Fed left unchanged March 13 its statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008.

Inflation “has been subdued in recent months although prices of crude oil and gasoline have increased lately,” the Fed said. The increase in oil will “push up inflation temporarily, but the committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”

Economic Data

U.S. industrial production was little changed last month, compared to a predicted 0.4 percent expansion, the Federal Reserve reported today, and consumer confidence decreased in March. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.3 in March from 75.3 the prior month. The gauge was projected to rise to 76.

JPMorgan Chase & Co. raised its forecast for the dollar against the euro and the yen this year. The euro will drop to $1.36 from $1.38. Against the Japanese currency, the dollar will strengthen to as high as 86 by mid-June before ending the year at 83.

Sterling rose against all its major counterparts as 10-year gilt yields headed for the biggest weekly gain since January 2009, increasing the appeal of pound-denominated assets.

The currency gained 0.9 percent to $1.5844 and 0.1 percent to 83.16 pence per euro as the benchmark 10-year gilt yields headed for a 29 basis point advance, or 0.29 percentage point, on the week.

The yield premium that investors receive in gilts versus similar maturity U.S. debt widened to 15 basis points from nine basis points yesterday.

Sterling was also supported against the 17-nation euro amid speculation the European Central Bank may not take further action to fight Europe’s debt turmoil as inflation nears its 2 percent limit even as the economy contracts.

“We’ve done a lot,” European Central Bank Governing Council member Erkki Liikanen said in a Bloomberg News interview in Helsinki yesterday, citing the central bank’s record-low interest rates and three-year loans. “We must also decide how and when we exit in a controlled and timely manner,” he said, declining to elaborate.

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