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Inflation evidence curbs inflation fears { November 2007 } Original Source Link: (May no longer be active)
http://www.reuters.com/article/usDollarRpt/idUSN1443745720071214http://www.reuters.com/article/usDollarRpt/idUSN1443745720071214
FOREX-Dollar up sharply, boosted by strong US CPI data
Fri Dec 14, 2007 12:30pm EST
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 14 (Reuters) - The dollar gained broadly on Friday, posting its largest daily increase against the euro in nearly three years after strong U.S. consumer price data trimmed expectations of aggressive rate cuts from the Federal Reserve.
The Consumer Price Index for November rose at its fastest pace in more than two years, which may limit the Fed's willingness to ease rates and, in turn, preserve the return on dollar-denominated assets. The data also propelled the dollar to a seven-week peak against a basket of currencies.
The CPI report followed Thursday's robust U.S. retail sales and producer prices data for November, suggesting the U.S. economy is far more resilient that many initially thought.
"More evidence of rising U.S. inflation underlines the Federal Reserve's policy bind and raises chances the central bank will stick to non-interest rate easing liquidity solutions for the struggling money market," said Ashraf Laidi, chief currency analyst at CMC Markets USA in New York.
That should "spare the U.S. currency from interest rate cuts and help it from a relative yield perspective," he added.
In midday trading, the euro fell 1.4 percent to $1.4419 against the dollar, the lowest in about six weeks, according to Reuters data. The single currency is on track to post its largest daily fall since early January 2005.
"We think this can go for another couple of cents, with the euro probably headed initially to $1.4360 or so and maybe as far as $1.40," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.
"Our view is that dollar weakness has been driven by cyclical influences, not structural ones. Now that the UK and Canada are cutting rates, it looks like the dollar has bottomed against those currencies," he added.
The New York Board of Trade's dollar index, which tracks the greenback's progress against six major currencies, was up 1.1 percent at 77.348 .DXY. It rose to 77.411, the highest since Oct. 25, on pace to post its biggest daily gain in more than one year.
Following the CPI data, the implied chances for a Fed rate cut in January fell as low as 80 percent from 98 percent overnight.
The Fed cut its benchmark federal funds rate by a quarter percentage point to 4.25 percent on Tuesday, and together with other major central banks unveiled the next day a plan to ease the global credit crunch.
Dollar, euro and sterling London interbank offered rates (Libor) all fell on Friday for the second straight day following Wednesday's coordinated central bank liquidity plan.
However, the magnitude of decline was still modest, suggesting it will take time before banks become comfortable lending to each other again.
As well as data, investors are paying close attention to news from the financial sector, with more U.S. banks reporting results next week.
Against the yen, the dollar rose 1.1 percent to 113.46 , after rising to a five-week peak at 113.49.
The yen has been pressured by a survey showing weak sentiment among Japanese manufacturers, which backed the argument the economy is still too feeble to warrant the Bank of Japan raising rates from an ultra-low 0.5 percent. (Additional reporting by Lucia Mutikani and Steven C. Johnson; Editing by Andrea Ricci)
© Reuters 2007.
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