Dollar gains ahead of Fed; euro struggles on data

NEW YORK - The dollar gained on Tuesday, touching a 2-1/2-month peak against the euro on concerns about euro zone banks, while strong U.S. inflation data, suggesting the Federal Reserve could raise interest rates sooner than anticipated, sent the greenback higher against the yen.

By (Reuters)

Published: Wed 16 Dec 2009, 1:12 AM

Last updated: Thu 2 Apr 2015, 8:29 AM

The Fed, which ends a two-day policy meeting on Wednesday, has said rates are likely to remain very low for an extended period. Any hints to the contrary would increase the dollar’s appeal by raising the return on dollar-denominated assets.

Data on Tuesday showed U.S. producer prices rose 1.8 percent last month, the largest gain in three months. That pushed up U.S. bond yields and came on the heels of stronger U.S. employment and consumer spending data.

“We’ve had a string of very good U.S. data releases compared to Europe, and today’s data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected,” said Michael Woolfolk, currency strategist at BNY Mellon in New York.

Economists polled by Reuters expect data Wednesday to show U.S. consumer prices rose 0.4 percent overall in November.

The euro fell to $1.4504, according to Reuters data, its lowest since early October. It last traded down 1 percent at $1.4515.

A closely-watched survey that showed German investor sentiment soured in December hurt the euro, as it suggested a sluggish recovery for the euro zone’s top economy.

Euroland bank, fiscal worries

Also weighing on the euro were a report saying Austrian monetary authorities had put the country’s No. 4 bank on a watch-list and ongoing worries about the weak fiscal positions of some euro zone countries. After having its credit rating cut last week, Greece announced spending cuts Monday aimed at reining in its debt.

“Problems in Greece continue, and the news about the Austrian bank hasn’t helped either,” said Ian Stannard, currency strategist at BNP Paribas in London.

The dollar soared 1.4 percent to 89.80 yen and 1 percent to 1.0419 Swiss francs, while sterling fell 0.4 percent to $1.6240.

The Fed’s ultra-low interest rate policy has kept the dollar under pressure for most of 2009. Though it hit a 2-1/2-month high against a basket of major currencies on Tuesday, the dollar has lost some 5 percent in 2009 on that calculated measure.

Some other central banks have started raising rates. The Reserve Bank of Australia has led the way in the developed world with three consecutive rate hikes, bringing borrowing costs to 3.75 percent.

But on Tuesday, RBA minutes helped push the Australian dollar down 1 percent to $0.9076. Analysts said the minutes from the bank’s last meeting were not as hawkish as expected, suggesting it may pause in its tightening cycle.

But the Fed also faces tough choices, analysts said. A reminder came from a report showing New York state manufacturing fell unexpectedly this month.

“Unfortunately the sharp drop in the survey will make it difficult for the Fed to be anything more than cautiously optimistic,” said Kathy Lien, director of research at GFT Forex in New York.

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