Euro Gains Versus Dollar After German Inflation Data

The euro dropped for a second consecutive week versus the dollar for the first time in almost five months on speculation European Central Bank and Federal Reserve monetary policies are deviating.

The 18-nation currency touched the lowest level in a month amid comments from policy makers, from Bundesbank President Jens Weidmann saying there’s low risk of deflation, to ECB Governing Council member Jozef Makuch citing higher risks of deflation. Currencies of commodity producers rallied amid speculation China will do more to support economic growth. The ECB meets April 3, a day before the U.S. is forecast to report employment growth.

“The sense that the ECB needs to react is very strong; their delivery tends to be somewhat disappointing,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in a phone interview. “We’re starting to see the beginning of divergences in policies, which we haven’t seen for many years, and that is very good for the foreign-exchange market.”

The euro fell 0.3 percent to $1.3752 this week in New York, after dropping 0.9 percent last week. It touched $1.3705 yesterday, the lowest level since Feb. 28. The currency last depreciated for two straight weeks in the 10 trading days ended Nov. 8. It has lost 0.4 percent in March.

The shared currency rose 0.3 percent versus the yen to 141.40 and has gained 0.7 percent in March. The Japanese currency fell 0.6 percent to 102.83 per dollar in a second weekly loss. The yen has dropped 1 percent this month.

Winners, Losers

South Africa’s rand climbed the most among the greenback’s 31 major counterparts this week, rallying 3 percent, while Brazil’s real was the second-biggest winner, gaining 2.8 percent. Sweden’s krona was the biggest loser, weakening 1.2 percent, followed by the yen.

An equally weighted basket of the so-called dollar-bloc currencies -- those of Australia, New Zealand and Canada, all commodity producers -- rallied to 102.61 this week, the highest level since Oct. 22, against the yen and the dollar.

“The other theme that has emerged this week is the strength of the dollar-bloc currencies,” Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co., wrote in a client note yesterday.

Australia’s dollar rose to the strongest in four months as Chinese Premier Li Keqiang said his nation can’t ignore “difficulties and risks” from downward pressure on its economy. It has policies in reserve to deal with economic volatility this year, Li said in a statement yesterday on the government website. China is Australia’s largest trade partner.

The Aussie gained 1.8 percent this week, the most since the five days ended Feb. 7, to 92.47 U.S. cents. It touched 92.95 cents yesterday, the highest since Nov. 21.

European Outlook

The euro weakened 1.1 percent in the past three months in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar dropped 1.2 percent, while the yen strengthened 1.4 percent.

Reports this week showed declines in business climate and manufacturing in Germany, Europe’s biggest economy. Consumer-price inflation slowed this month in the nation and three of its states, and prices unexpectedly declined in Spain, data showed yesterday.

“The ECB has many measures; one of them is supplying liquidity into circulation,” Makuch said March 25 in Bratislava, Slovakia, citing “deflation risks.” The measures would depend on the circumstances, he said.

Draghi Comments

ECB President Mario Draghi said in a speech in Paris that day the central bank’s accommodative monetary policy should be increasingly felt throughout the euro-region economy. Still, he said, “if any downside risks to this scenario appear, we stand ready to take additional monetary policy measures.”

Bundesbank President Weidmann told foreign reporters in Berlin the risk of deflation in Europe is “very low.”

The council will keep the benchmark interest rate unchanged at a record-low 0.25 percent when it announces a policy decision on April 3, according to most economists surveyed by Bloomberg.

While Draghi’s outlook is that financial conditions will improve in Europe as the financial system heals, there’s still an issue of timing, Andrew Milligan, Edinburgh-based head of global strategy at Standard Life Investments Ltd., said in an interview. The firm manages about $270 billion.

“It might be 2015, but it’s not 2014” when the system regains its health, he said yesterday in New York. “We are getting mixed signals from the ECB.”

Fed Stimulus

The U.S. central bank last week cut its bond buying to $55 billion, from $85 billion last year, citing “underlying strength” in the economy. Fed Chair Janet Yellen said the stimulus program may conclude by year-end and the key interest rate may rise from virtually zero about six months later.

U.S. employers hired 200,000 workers in March, according to the median forecast of economists surveyed by Bloomberg before the Labor Department reports the data next week. That compares with 175,000 the previous month.

Sterling gained versus the euro and dollar this week as U.K. retail sales including auto fuel increased 1.7 percent in February from a month earlier. Economists polled by Bloomberg forecast growth of 0.5 percent. Gross domestic product expanded for a fourth quarter, growing 0.7 percent, matching forecasts.

The pound rose 0.9 percent to $1.6638, snapping a three-week drop. The British currency rallied 1.2 percent to 82.65 pence per euro, the biggest gain since Feb. 14.

Sterling has outperformed all of 31 major peers in the past 12 months amid speculation the U.K.’s economic growth will cause the central bank to bring forward interest-rate increases. Bank of England policy maker Martin Weale said last month they will “come perhaps in the spring of next year.”

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