Dollar Drops to 4-Month Low as Inflation Decline Clouds Outlook

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The dollar fell to the lowest in almost four months as a drop in producer prices showed sluggish U.S. growth persisting beyond the first quarter, fueling speculation the Federal Reserve is in no hurry to raise interest rates.

The U.S. currency slid for a third day after the Labor Department said producer prices unexpectedly fell 0.4 percent in April. It was the latest in a series of weak economic data complicating the Fed’s effort to raise rates for the first time in almost a decade. The dollar briefly pared losses against the euro after European Central Bank President Mario Draghi said the region’s quantitative easing policy will be implemented “in full” during a speech in Washington.

“We’ve not gotten the data that would be consistent with a stronger dollar,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said in a phone interview. “It’s not surprising that we’ve seen a healthy retracement.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major trading partners, slipped 0.3 percent to 1,150.80 as of 5 p.m. in New York. It reached the the lowest level since Jan. 21. The index is down 4.1 percent over the past month, stalling a 20 percent rally that started in early July.

The greenback fell 0.5 percent to $1.1412 per euro, after dropping 1.3 percent Wednesday. It was little changed at 119.17 yen.

One-Month Outlook

Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London, was surprised by the timing of the dollar selloff, even though he expected it to occur eventually. Investors are still sticking to the view that the dollar will recover to advance against the euro, he said.

“There is probably an element of surprise even for people like us who are euro-positive and dollar-negative,” he said.

Compounding the dollar’s decline are European bond yields that have risen faster than those on U.S. Treasuries.

“The further rise in bund yields is keeping EUR-USD bid, and the short-term correlation between the bund-Treasury spread and EUR-USD remains strong,” Kit Juckes, a London-based strategist at Societe Generale SA, wrote in a note to clients.“Until bund yields peak, we can’t think about calling a top in the euro.”

Bund Effect

The extra yield investors receive for holding U.S. 10-year Treasuries instead of similar-maturity German bunds narrowed three basis points, or 0.03 percentage point, to 1.53 percentage points, the lowest on a closing basis since Feb. 5.

The 19-nation currency was also supported by gross domestic product data released Wednesday showing an increase of 0.4 percent compared with the fourth quarter of 2014, the strongest growth since 2013.

A decline in U.S. unemployment applications was overshadowed by the drop in producer prices that signaled inflation will remain below the Fed’s 2 percent target. Jobless claims decreased by 1,000 to 264,000 in the seven days ended May 9, with the four-week average falling to the lowest since April 2000.

“It is really all about dollar weakness across the board,” said Keng Goh, a foreign-exchange strategist at Royal Bank of Canada in London. While RBC expects the Fed to increase interest rates in September, “no doubt some of the weakness in the data will probably diminish that conviction a little bit.”

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