Diverging Inflation Ends Worst Dollar Run Versus Euro in a Month

  • Core consumer prices advance more than forecast in U.S.
  • ECB's Nowotny says bank `clearly missing' its price targets

With below-target inflation stalking developed economies, a few tenths of a percentage point here or there are making all the difference to foreign-exchange traders.

The dollar rose for the first time in six days versus the euro, curtailing its worst streak in a month, as a gauge of U.S. core consumer prices advanced more than projected in September. The common currency tumbled against most of its major counterparts as the European Central Bank’s Ewald Nowotny said the institution is “clearly missing” its inflation goal before a report due Friday.

“This number should reassure the Federal Reserve and the markets that maybe the economy is not heading into some kind of a period of protracted weakness,” Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said of the U.S. price report. “The combination of persistent euro strength and negative inflation prints really puts a lot of pressure on the ECB to do more.”

Serebriakov recommended selling the euro at $1.1450 and targeting $1.09, according to a note published Thursday.

The dollar added 0.8 percent to $1.1386 per euro as of 5 p.m. New York time, the most in three weeks, reversing an earlier decline to its weakest since August.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 peers, rose 0.2 percent after closing at a more than three-month low on Wednesday.

Inflation Battle

Central bankers in Europe and the U.S. have struggled to revive consumer prices that lag far below their targets for about 2 percent inflation. Oil’s decline to less than $50 a barrel has weighed on prices, stymieing the Federal Reserve’s efforts to normalize monetary policy this year, and encouraging chatter about further easing by the ECB.

New York Fed President William C. Dudley said on Thursday that recent economic news suggests the economy is slowing but that he favors raising interest rates later this year if his forecast is met. Cleveland Fed President Loretta Mester later said it’s time for policy makers to “take a step back” from the emergency monetary policy of zero interest rates.

Thursday’s report suggests that U.S. inflation is moving higher. Prices excluding food and fuel rose 0.2 percent last month from August -- the most in three months -- and 1.9 percent from a year earlier, a Labor Department report showed.

“We certainly could see some higher prices as we go through 2016,” said Dan Heckman, senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees about $126 billion. “What you’re going to see is maybe the market start building back in the potential for a December fed funds rate increase if we get some decent economic numbers.”

In Europe, a report Friday will confirm euro-zone consumer prices fell last month for the first time since the central bank started its quantitative-easing program in March, economists surveyed by Bloomberg predict.

The shared currency has advanced against 15 of 16 major peers since the end of June, putting downward pressure on prices.

Nowotny, an ECB Governing Council member who also heads the Austrian central bank, said in a speech in Warsaw Thursday that “additional” steps may be necessary to achieve growth, and “these include structural measures.” While he signaled a preference for governments to play a stronger role, his speech is likely to feed speculation that the ECB will step up its own measures.

“The ECB should be very worried about the failure of inflationary pressures to start recovering,” said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. “There’s the potential for them to step up their dovish rhetoric,” in which case the euro will fall “a little bit lower” during the next three months, she said.

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