Euro-zone inflation tumbles in November; ECB cut likely
NEW YORK (MarketWatch) -- The U.S. dollar added to gains in overseas trading Friday, as weak equity markets sent investors into safer assets and speculation of a large European interest-rate cut weighed on the region's single currency.
In late afternoon New York trading, the euro was down 1.4% against the greenback to $1.271. The dollar advanced 0.3% against its Japanese counterpart to 95.56 yen. It gave up some gains against the British pound, which reversed to move 0.2% higher at $1.5415.
"The dollar has indeed staged a bit of a recovery today," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange Ltd.
Risk appetite, which had returned earlier in the week on news of the U.S. Federal Reserve's plans to buy troubled mortgage assets, the $30-billion British stimulus plan and optimism over President-elect Barack Obama's financial appointments, has fallen, he said.
"Heading into the weekend and with tensions still high and liquidity low, some of that risk appetite waned and this has, in general, benefited the dollar and to an extent the yen," he said.
The yen and dollar generally rally when investors seek safer assets.
The euro was last buying 121.44 Japanese yen, down 1.2%. The British pound, however, rose 0.4% to 147.35 yen.
After a weak open, stocks clawed their way to a fifth straight session of gains. Trading was light on Wall Street after most markets had closed Thursday for the Thanksgiving Day holiday. See Market Snapshot.
The U.S. dollar index was up 0.1% for the week and 1.7% for the month.
Technical selling of the euro also helped the buck Friday, said Brown Brothers Harriman & Co. senior currency strategist Win Thin, as the euro broke through the key trading level of $1.268.
Euro inflation
European stocks turned around to end the day slightly higher, helped by drug stocks and insurer Allianz Se
The euro lost steam after posting little immediate reaction to a much larger-than-expected slowdown in the pace of consumer inflation across the 15-nation euro zone in November.
In a preliminary estimate, the statistical agency Eurostat said the annual rate of inflation slowed to 2.1% from a rate of 3.2%. Economists were expecting a more modest decline.
The data leave annual inflation only a shade above the European Central Bank's target of just below 2% and indicate inflation could hit that target by the end of the year -- well ahead of the ECB's own projections, economists said. See full story.
The euro held onto small losses versus the dollar in the immediate wake of the data, but then edged down to make new lows for the day.
"The bottom line from the ECB is they will cut rates next week," said Kenneth Broux, an economist at Lloyds TSB.
Although the data signal that the ECB has plenty of room to cut quite aggressively, the central bank's Governing Council is likely to drop the key lending rate by half a percentage point, or 50 basis points, to 2.75% from 3.25% when it meets on Thursday, Broux said.
But economists said a bigger move isn't out of the question, particularly since ECB President Jean-Claude Trichet said that policymakers had pondered a 75 basis point reduction at their last meeting before settling on a 50 basis point easing.
The euro slipped 1.6% against sterling, to 82.43 pencde, in New York trading.
"The big story today has been the euro," said Gallo of Schneider Foreign Exchange. "The euro has fallen completely out of bed on speculation that today's November inflation estimate from Eurostat might spur a bigger than 50 basis point cut from the ECB next week," he said.
India's rupee edged back up against the U.S. dollar, with the greenback last trading at 49.55 rupees. In European markets trading, the currency lost 1.7% against the euro, which traded at 63.991 rupees.
Indian foreign-exchange and other markets were closed Thursday amid terror attacks in Mumbai.
