Dollar Advances as European Data Highlights Risks of Slowdown

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The dollar rose the most against the euro in more than a week as signs of growth faltering in Europe contrast with an improving U.S. economy.

The 18-nation shared currency dropped after reports showed industrial production in the region slumped and Germany’s government cut the economic outlook for this year and the next. The pound fell against most of its major peers as a report showed U.K. inflation declined to a five-year low. The yen rose against most major peers on haven demand, while the Canadian dollar reached the lowest since July 2009 as crude oil fell.

“The situation in Europe continues to deteriorate, but the concern is spilling over into the global economy,” said Sireen Harajli, a Mizuho Bank Ltd. strategist in New York. “The dollar continues to benefit in this environment, in our view, and the incoming data continues to support that.”

The dollar strengthened 0.7 percent to $1.2658 per euro at 5 p.m. New York time and rose as much as 0.9 percent, the biggest intraday gain since Oct. 3 and recovered most of yesterday’s 1 percent decline. The greenback climbed 0.2 percent to 107.05 yen. The yen strengthened 0.5 percent to 135.51 per euro.

The dollar pared a decline from yesterday triggered by Federal Reserve comments that slower global growth may delay U.S. interest-rate increases. The U.S. economy will expand 2.2 percent this year and 3 percent in 2015, according to Bloomberg News surveys. The euro area will grow 0.8 percent and 1.3 percent, while Japan’s will expand 1 percent in 2014 and 1.2 percent the following year, the surveys predict.

Haven Demand

“Weak data is undermining the euro, with inflation expectation retreating again, that’s no good for the euro,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “Yen crosses can probably outperform partly in an environment where risk aversion seems to be creeping back into the market’s thinking.”

The yen gained versus most of its major peers as concern global economic growth is faltering and the risk of Ebola spreading prompted demand for haven assets.

The Japanese government will release finalized data on industrial production tomorrow. Output unexpectedly fell 1.5 percent in August from the previous month, according to the initial reading.

Germany’s Economy Ministry cut its 2014 forecast to 1.2 percent from 1.8 percent previously, and slashed its estimate for next year to 1.3 percent from 2 percent.

Data earlier showed investor confidence in the European nation fell to the weakest level in almost two years.

Inflation Expectations

The euro also slid as Eurostat said industrial production in the euro area declined 1.8 percent in August, matching September 2012’s level which was the least since 2009. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which seeks to predict economic developments six months in advance, fell to minus 3.6 in October, the lowest level since November 2012.

Inflation expectations in the euro zone fell to the lowest in at least six years. The 5-year, 5-year inflation swap rate fell to 1.82 percent, the lowest since Bloomberg started compiling the data in September 2008.

Options traders are betting on further weakness in the euro, 25 delta risk-reversals show. Traders are willing to pay a higher price for options to buy the dollar than to sell it for every period from one day to 10 years, according to data compiled by Bloomberg. One-year options are the most expensive, with a premium of 1.03 percentage points.

The Canadian dollar fell 0.9 percent and reached C$1.1297 per U.S. dollar. Crude oil, the nation’s largest export, fell to the lowest level in almost four years after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009.

Sterling Surprise

The pound fell versus the dollar as a report showed U.K. inflation slowed more than economists forecast, damping expectations for higher Bank of England interest rates.

The annual pace of consumer-price growth dropped to 1.2 percent from 1.5 percent in August, the Office for National Statistics said. That’s the lowest since September 2009 and compared with economists’ forecast for a reading of 1.4 percent. Core inflation also slowed to a five-year low.

“The market spent the first half of the year getting excited about how quickly the BOE might have to hike,” said Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc in London. “Now they are having to delay those expectations. The real surprise is that there has not been an even bigger sterling selloff in response to this sizable downside surprise.”

Sterling dropped 1.1 percent to $1.5904.

The krona slid against all 31 of its major peers as Statistics Sweden said consumer prices fell 0.4 percent on an annual basis in September. The median forecast in a Bloomberg News survey was for a drop of 0.1 percent.

Sweden’s currency declined 1.9 percent to 7.2511 per dollar and weakened 1.2 percent to 9.1784 per euro.

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