Lower inflation figures weigh on dollar - Fed seen committing to zero-rate policy

Lower inflation figures weigh on dollar - Fed seen committing to zero-rate policy
By Peter Garnham
Copyright The Financial Times Limited 2009
Published: June 17 2009 10:43 | Last updated: June 17 2009 17:59
http://www.ft.com/cms/s/0/2d22b9e8-5b1e-11de-be3f-00144feabdc0.html


The dollar lost ground on Wednesday as figures showed US inflationary pressures remained well contained.

The US consumer price index rose 0.1 per cent in May. This was below expectations and dragged the annual inflation rate down to its lowest level since 1950.

Analysts said the dollar was likely to suffer from speculation that the Federal Reserve would send a clear message after next week’s policy meeting that a rise in US interest rates was a long way off.

Recent strength in US economic data has lifted US Treasury yields, sparking speculation that the Fed might raise rates sooner than expected to contain inflationary pressures.

However, Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said that, while data were improving, there was limited risk of an upsurge in inflation. He said this meant there was justification for the Fed to strengthen its wording in regard to maintaining its monetary policy stance.

“Next week’s Fed meeting may well be accompanied with fresh wording that sends a clear message over the prospect of a prolonged period of maintaining the current zero interest rate policy,” said Mr Halpenny.

“Anticipation of this may build in the meantime prompting some renewed speculative selling of the dollar.”

Dollar weakness was tempered, however, as falling stock markets fuelled risk aversion and boosted haven demand for the US currency.

By midday in New York, the dollar eased 0.3 per cent to $1.3871 against the euro, fell 0.5 per cent to Y95.94 against the yen and lost 0.2 per cent to SFr1.0863 against the Swiss franc.

Meanwhile, sterling suffered in spite of a smaller-than-expected rise in UK unemployment as investors cashed in following the pound’s recent strong run.

“Positioning in the pound has become quite extended, especially against the euro,” said Adam Cole at RBC Capital Markets. “We are just seeing an extreme bout of profit-taking despite the positive news flow.”

The pound fell 0.8 per cent to $1.6269 against the dollar and lost 1 per cent to £0.8524 against the euro.

Meanwhile, the Norwegian krone clawed back initial losses after Norges Bank, Norway’s central bank, cut interest rates by 25 basis points to a record low of 1.25 per cent.

The krone fell on the news because analysts had been expecting the central bank to keep rates on hold.

But the currency rallied as the accompanying monetary policy report showed that the central bank expected the move to be the last of this cycle. Indeed, the Norges Bank’s projections showed it expected to raise rates in the second quarter of next year.

Geoffrey Kendrick at UBS advised clients to buy the krone against the euro, given the Norges Bank was the first central bank globally to predict rate rises at the end of the current cycle.The Norwegian krone rose 0.4 per cent to NKr6.3973 against the dollar and climbed 0.1 per centto NKr8.8786 against the euro.