Dollar Advances to Five-Month High Versus Euro Before CPI Data
Washington (July 22) The dollar rose to the highest in five months versus the euro as an increase in short-term U.S. Treasury yields signaled mounting speculation that Federal Reserve Chair Janet Yellen will need to raise interest rates.
Economists said a report today will show U.S. consumer prices held at the fastest pace since 2012, adding pressure on the Federal Reserve to tighten policy sooner, while the European Central Bank has introduced unprecedented stimulus to stop inflation falling too low. Indonesia’s rupiah weakened from a two-month high as presidential candidate Prabowo Subianto rejected the election as undemocratic. Russia’s ruble headed for the strongest gain in a month.
“More evidence of higher inflation in the U.S. would be seen as positive for the dollar as long as it leads to a pickup in short-term U.S. yields,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If higher inflation persists, it will challenge Yellen’s dovish view that this is just a temporary phenomenon. The contrast is becoming more notable between ECB and Fed policy.”
The dollar appreciated 0.3 percent to 1.3484 per euro at 7:08 a.m. New York time, after touching $1.3478, the strongest level since Feb. 3. The euro fell 0.2 percent to 136.91 yen. The Japanese currency weakened 0.1 percent to 101.54 per dollar.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.1 percent to 1,011.10 after advancing to 1,011.28, the highest level since June 20.
Rate Outlook
Traders saw a 46 percent chance the Fed will raise the target rate for overnight bank lending by June, according to futures data compiled by Bloomberg as of yesterday. That’s up from a 40 percent possibility on June 30.
U.S. consumer prices climbed at an annual rate of 2.1 percent in June, matching May’s figure that was the most since October 2012, according to a Bloomberg News survey before today’s Labor Department report. The rate has increased from 1.1 percent in February.
Treasury two-year yields were at 0.49 percent after touching 0.50 percent, the highest since July 9. Their 20-day correlation with dollar-yen was 0.67 percent, indicating the strongest relationship since March 28. Two-year yields are seen by investors as most sensitive to interest-rate expectations, whereas longer maturities are more influenced by the outlook for inflation.
The dollar has appreciated 0.5 percent in the past month, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The yen advanced 1.1 percent, the best performer, while the euro lost 0.4 percent.
Aussie Advances
Australia’s dollar rose versus all except one of its 16 major peers after Reserve Bank of Australia Governor Glenn Stevens didn’t comment directly on the currency or monetary policy in prepared remarks at a luncheon today in Sydney. The currency tumbled 1 percent on July 3 when he said it was “overvalued” by most measures.
“I’d still maintain up to this point that we’re doing what can reasonably be done,” Stevens said in response to questions after today’s speech. “But if there’s more that can reasonably be done at some point, then obviously we’d do that. But I’m content right now.”
The Aussie gained 0.2 percent to 93.90 U.S. cents after dropping 0.2 percent yesterday.
Indonesia’s rupiah fell for the first time in five days as Prabowo withdrew his witness team from the election commission before final results scheduled to be released later today. The currency appreciated earlier on speculation the results would confirm Joko Widodo’s victory in this month’s presidential election.
Election Count
The election commission completed its count for 24 of 33 provinces late yesterday. KawalPemilu.org, a volunteer-run website that tracks actual results, showed Widodo winning 53.2 percent support with 100 percent of ballots tallied at the provincial level, while Prabowo Subianto had 46.8 percent.
The currency fell 0.3 percent to 11,606 per dollar after strengthening earlier to 11,503, the strongest level since May 21, according to prices from local banks.
The ruble advanced as Alexander Borodai, prime minister of the self-proclaimed Donetsk People’s Republic, handed black box flight and data recorders to Malaysian specialists yesterday following last week’s downing of a Malaysian Airlines jet over eastern Ukraine. The UN Security Council unanimously approved a resolution calling for an international probe into the incident, unimpeded access to the crash site and an end to military activities around the wreckage.
The ruble added 1.1 percent to 47.0900 against the euro and strengthened 0.9 percent versus the central bank’s target basket of dollars and euros to 40.4032, the biggest gain since June 23
Source: Bloomberg
