Dollar Extends Decline as U.S. Inflation Data Underwhelm Traders

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  • Greenback weakens against most of its major counterparts
  • Bloomberg U.S. economic surprise index falls below zero

Central Banks Have Created a Monster: Saint-Georges

The dollar fell for a second day, extending a retreat from a seven-month high, as a report showed September consumer prices excluding food and fuel costs rose less than forecast.

The greenback dropped against most major peers on speculation that the Federal Reserve will raise interest rates in December, while taking a slow path on further increases. An uneven picture of the world’s biggest economy mirrors the approach that the Fed seems to be taking on policy, after Chair Janet Yellen laid out arguments last week for remaining accommodative without taking a 2016 hike off the table.

"With underlying inflation underwhelming, it’s catalyzed more profit-taking on the buck’s recent outperformance,” said Joe Manimbo, an analyst with Western Union Business Solutions, a unit of Western Union Co., in Washington. Remarks by Yellen and Vice Chairman Stanley Fischer underscore the likelihood of a “lethargic pace” of rate increases, he said.

The dollar has fallen almost 3 percent this year on speculation that mixed economic data and political risks would limit the Fed’s ability to tighten monetary policy. The losses had narrowed in recent weeks on speculation that the central bank is getting closer to its first rate hike since December, prompting hedge funds and money managers to boost net bullish bets.

The Bloomberg Dollar Spot Index, which measures the U.S. currency against 10 major counterparts, fell 0.2 percent as of 5 p.m. in New York. It touched the highest level since March last week. The greenback was little changed at $1.0981 per euro and 103.87 yen.

Level Reset

Futures pricing indicates a gradual pace of Fed rate hikes, with traders seeing a 63 percent probability the central bank will tighten policy by December. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase.

“The market has clearly come to a stronger view that they’ll raise rates in December, but that has very little influence on where rates are perceived to go in the longer term,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London.

The consumer price index increased 0.3 percent in September from the previous month, matching the median forecast of economists, after a 0.2 percent gain in August. Excluding volatile food and fuel costs, prices were up 0.1 percent, missing an estimate of 0.2 percent.

The Bloomberg U.S. ECO surprise index -- which measures whether economic data have exceeded or fallen short of analysts’ estimates -- fell below zero this week for the first time in two weeks.

“The U.S. inflation data was pretty beige -- we’re not seeing rampant inflation pressures,” said Jeremy Cook, chief economist at London-based World First U.K. Ltd. “People were looking for a little bit of a reason to get out of dollar positions, which have been very profitable over the course of the past week.”