Dollar Falls to 1-Week Low as CPI Backs Fed; Pound Erases Gain

The dollar dropped to a one-week low against the euro as a report showed U.S. inflation is contained, giving the Federal Reserve scope to maintain its monetary stimulus program.

The greenback headed for its first weekly loss against the 17-nation currency since the start of February before the Federal Open Market Committee meets next week to review its bond-buying program, known as quantitative easing, or QE. The euro rose against 12 of its 16 major counterparts as European leaders paved way for a deal on financial assistance for Cyprus. The pound erased gains versus the dollar after Bank of England Governor Mervyn King said in a television interview he sees a case for additional central-bank asset purchases.

“The dollar just ran away with the numbers, and this was just coming back to reality,” Alfonso Esparza, senior currency analyst in Toronto at the online currency trading firm Oanda Corp., said in a telephone interview.

The dollar declined 0.6 percent to $1.3076 per euro at 5 p.m. in New York, touching the lowest level since March 8. The U.S. currency depreciated 0.9 percent to 95.28 yen. Japan’s currency gained 0.3 percent to 124.58 per euro.

Zloty Falls

Poland’s currency fell against the euro after a more-than-forecast slowdown in price growth fueled bets record-low interest rates will be reduced further.

The zloty depreciated 0.2 percent to 4.1458 against the euro.

Malaysia’s currency weakened 0.4 percent amid concern the government will lose support in upcoming elections. The ringgit fell to 3.1235 per dollar.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, slid 0.6 percent to 82.138, after rising to 83.166 yesterday, the highest level since Aug. 3.

Fed policy makers indicated in December that an “exceptionally low” target interest rate is appropriate as long as inflation isn’t forecast to rise to more than 2.5 percent and unemployment stays above 6.5 percent.

U.S. consumer prices increased 2 percent in the 12 months ended in February, after a 1.6 percent year-over-year gain the prior month, a Labor Department report showed today in Washington. The core CPI, excluding food and energy, also rose 2 percent from February 2012, following a 1.9 percent advance in the prior 12 month period.

Fed View

“We think the Fed will keep doing what’s it’s doing for now, and maybe start tapering its open-ended QE toward the end of the year,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “In terms of the dollar weakness, I think it’s more just risk-on.”

The CPI was up 0.7 percent last month, the first increase in four months and the biggest since June 2009. The median forecast of 81 economists surveyed by Bloomberg called for a 0.5 percent rise. The surge in gasoline accounted for almost 75 percent of last month’s total price advance.

“Even as economic indicators improve, I expect the Fed to continue monetary easing” and that will weigh on the dollar, said Kengo Suzuki, a currency strategist at Mizuho Securities Co. in Tokyo. “There isn’t inflation concern yet in the U.S.”

Market Measure

The dollar has appreciated 2.5 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro rose 1.5 percent and the yen slumped 7.6 percent.

The euro gained for a second day versus the yen after European political chiefs paved the way for finance ministers to construct a rescue package for Cyprus, which requested a bailout in June. A deal on aid has been delayed by debate on how to cut the island nation’s debt.

Italy’s new lawmakers are scheduled to meet for the first time to begin electing leaders of both chambers, following an inconclusive vote on Feb. 24-25 for members of parliament. Party leaders will seek to build a majority and form a government.

“The news on Cyprus is taken as a positive steps and that is providing some comfort for the euro,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “The Italian parliament returns today and we expect some progress in putting some kind of a government into place even it will end up being a technocratic government at this stage.”

The pound rose to a one-week high against the dollar earlier today as King said told ITV News yesterday that “markets determine the level of exchange rate, not us.”

The pound gained 0.2 percent versus the dollar to $1.5114 after climbing to $1.5177, the strongest level since March 5. The currency has still dropped 5.5 percent this year, the worst performer among 10 developed-nation currencies after the yen, according to Bloomberg Correlation-Weighted Currency Indexes.

Sterling has tumbled 3.7 percent against the greenback since the start of last month. In that time, minutes of the Bank of England’s February decision showed King and two other policy makers were defeated in a push for more stimulus and Moody’s Investors Service cut the U.K.’s top credit rating.

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