Dollar Drop Deepens as Sluggish Inflation Brings on Bearish Mood

Dollar bulls reeling from the longest losing streak in 19 months face further pain.

U.S. inflation -- or rather the lack of it -- is back in the spotlight before monthly data and minutes from the Federal Reserve’s latest meeting that may show limits to the central bank’s tolerance for sluggish price gains.

Policy makers are chasing 2 percent inflation as part of their dual mandate to deliver price stability and maximum employment as they move toward raising borrowing costs for the first time since 2006. That rate outlook helped propel the dollar to its highest in more than a decade last quarter. With prices forecast to lag behind the Fed’s target for an 11th consecutive month, investors are starting to question whether the currency has outpaced the recovery.

“We have an emerging dollar-bearish mood,” Vasileios Gkionakis, UniCredit Bank AG’s London-based head of global foreign-exchange strategy, said by phone Friday. “We’d need to see a very very sharp acceleration in both activity and inflation to be able to justify the dollar at current levels.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major trading partners, fell a fifth week, it’s longest run of declines since October 2013. It slid 1.2 percent to 1,150.19 in New York and touched an almost four-month low.

The greenback slipped 2.3 percent against the euro to $1.1451 this week, and 0.4 percent to 119.25 yen.

Halfway Down

Hedge funds and other large speculators cut bets on the U.S. currency versus eight of its major peers to the least since September in the week through May 12, according to Commodity Futures Trading Commission data.

The dollar’s correction is only halfway through and it may decline a further 6 percent on a trade-weighted basis, UniCredit’s Gkionakis wrote in a note May 15.

The dollar has slumped more than 5 percent from its high on March 13 as a succession of reports on the U.S. economy missed forecasts. This week it was the turn of retail sales, industrial production and producer prices, suggesting a gauge of consumer prices may trail forecasts on May 22.

Inflation, excluding food and fuel, slowed to 1.7 percent in April from a year earlier, according to the median estimate of 35 analysts surveyed by Bloomberg News.

The Fed has attributed lackluster price gains to the “transitory effects” of a decline in energy and import prices. With oil rising for a ninth straight week in New York, that explanation is sounding hollow.

“CPI has been undershooting Fed expectations for some time now,” said Gary Stringer, chief investment officer at Stringer Asset Management LLC, which oversees about $300 million in assets from Memphis, Tennessee. “That will continue until we work through some more of the labor-market slack.”

Gap Narrows

In Europe, prices seem to be finding a floor. A release next week is forecast to confirm inflation was little changed in April from a year earlier, suggesting unprecedented stimulus by the region’s central bank is bearing fruit. Euro-area growth quickened in the first quarter, data showed this week.

Yields on the region’s bonds climbed, lifting demand for the 19-nation shared currency.

“We’ve had to reprice,” Shaun Osborne, head of global foreign-exchange strategy at Toronto-Dominion Bank, said by phone. “The strong bull case that was clear for the U.S. dollar late last year and early this year -- in the sense of expectations of monetary policy divergence and growth divergence -- has been challenged.”

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