Euro brushes off Ireland downgrade, ignores inflation rise
By William L. Watts and Lisa Twaronite, MarketWatch
LONDON (MarketWatch) — The dollar gained a little ground on most major rivals other than the Japanese yen Friday, as investors await U.S. data on consumer inflation for March.
Economists surveyed by MarketWatch expect the consumer price index to show a 0.5% March rise, matching February’s increase. Core CPI, which excludes food and energy, is forecast to rise 0.1% after a 0.2% increase in February.
The dollar index (DXY 74.82, +0.13, +0.18%) rose to 74.791 from 74.683 late Thursday, when it dipped as low as 74.617 — the lowest since December 2009.
Analysts at Commerzbank in Frankfurt said rising consumer prices are likely to keep the dollar under pressure until the Federal Reserve indicates its ready to begin tightening its ultra-loose monetary policy on U.S. interest rates.
“Usually the internal loss in value of a currency also entails an external loss in value (i.e. depreciation) if the central bank does not overcompensate for inflation with rate hikes,” they said, in a research note. “That means, contrary to the situation in other countries, a high inflation rate would not be good but bad for the greenback if we had to assume that the Fed will continue to ignore the problem.”
The euro (EURUSD 1.4446, -0.0039, -0.2692%) fell to $1.4467, down from $1.4493 in late North American trading on Thursday. See real-time currency quotes and tools.
The single currency saw only temporary pressure following a decision by ratings agency Moody’s Investors Service to cut Ireland’s credit rating two notches to Baa3 from Baa1, with a negative outlook, leaving the rating one notch above junk status.
The ratings agency cited an “expected decline in the Irish government’s financial strength combined with the country’s weaker economic growth prospects,” as well as “uncertainty created by the solvency test required by the European Stabilization Mechanism for the provision of future liquidity support.”
The euro gained little support from an upward revision to March annual consumer inflation in the euro zone, to 2.7% from an initial estimate of 2.6%. Inflation ran at a 2.4% annual pace in February.
The European Central Bank earlier this month delivered its first interest-rate hike in nearly three years in an effort to choke off inflation pressures.
Strategists also said they will be closely watching Sunday’s national election in Finland. Prospects for strong gains by the euro-skeptic True Finns party could make it difficult to gain approval of a planned bailout for Portugal as well as increased funding for the euro-zone’s bailout mechanisms. Read more on how Finland election could translate into jitters for the euro.
Against this backdrop, “long euro positions or spread-compression plays in the euro zone held over the weekend do not seem to make sense,” said Steven Barrow, currency and fixed-income strategist at Standard Bank.
The British pound (GBPUSD 1.6348, +0.0001, +0.0061%) traded at $1.6350, little changed from $1.6354 in late trading Thursday, while the Australian dollar (AUDUSD 1.0521, -0.0021, -0.1992%) fetched $1.0530, down from $1.0549.
Against the yen, the dollar (USDYEN 83.3000, -0.2300, -0.2754%) slipped to ¥83.21 from ¥83.41 late Thursday.
In Washington for meetings of finance ministers and central bankers from Group of Seven and Group of 20 industrial and developing nations, Finance Minister Yoshihiko Noda, said he would turn to other G-7 countries for help in coordinating another intervention for the Japanese currency it it became “excessively volatile.” Read more on Group of Seven meeting.
Noda told The Wall Street Journal in an interview Friday that he would take “decisive steps” to stabilize the yen if it becomes “excessively volatile,” even though the currency market had “calmed down” since last month’s concerted G-7 intervention.
A spate of Chinese economic data was the highlight of the Asian session, but it had little impact on currencies as the figures were in line with those leaked in the previous session ahead of the release.
China’s consumer inflation accelerated in March to its fastest rate in almost three years, slightly ahead of expectations, suggesting China could further tighten policy. Read more on China data.
“Not surprisingly, there were no major moves in Asian forex markets on the back of official release; on the other hand, there was some buying after the bullish rumor numbers were circulated yesterday,” said Roland Randall, senior strategist for fixed income and foreign exchange at TD Securities.
