The dollar declined to the weakest level against the euro in more than
two weeks as investors reduced speculation that the Federal Reserve
will increase borrowing costs in August.
The U.S.
currency fell against the yen as stock markets tumbled on concern a
slowing economy will hurt the earnings of banks and consumer companies.
The pound rose to a seven-week high against the dollar after Bank of
England GovernorMervyn King said policy makers will do what's needed to stem inflation.
``People are starting to wonder whether the Fed has the guts to raise
rates in the first place,'' said Matthew Kassel, director of
proprietary trading at ING Financial Markets LLC in New York. ``The
dollar could test $1.60 in the next month.''
The
price of crude oil for August delivery rose more than $3 a barrel to
$138.33 on the New York Mercantile Exchange after the head of Libya's
national oil company said it may cut production. Investors buy
commodities as a hedge against the falling dollar as accelerating
inflation erodes the value of the U.S. currency.
Stronger Pound
The
pound strengthened after King said inflation in the U.K. will probably
exceed 4 percent in the coming months. Sterling increased as much as
0.7 percent to $1.9895, the highest since May 2, after theBOE governor
told lawmakers in London that ``although inflation is rising now, we
will insure that it falls back to the 2 percent target.''
The
U.S. currency fell versus the euro yesterday as the Fed left the target
lending rate at 2 percent and said in a statement at the end of its
two-day meeting that ``uncertainty'' about the inflation outlook
remains high.
The chance that the Fed will increase the
target rate for overnight lending between banks at its next meeting on
Aug. 5 has fallen to 22 percent, from 36 percent yesterday and 44
percent a week ago, according to futures on the Chicago Board of Trade.
The balance of bets is on no rate change.
Trichet on Inflation
European Central Bank President Jean-Claude Trichet
reiterated yesterday in speech before the European Parliament in
Brussels that policy makers may increase the 4 percent main refinancing
rate by a quarter-percentage point on July 3 to contain inflation.
``The euro is generally benefiting from expectations the ECB will raise
rates next week,'' said Marcus Hettinger, a currency strategist in
Zurich at Credit Suisse
Group, Switzerland's second-biggest bank. ``The ECB is focused on
inflation, and that's supporting the euro. It's not the real economic
data that's driving the euro.''
``Due
to the underlying growth concerns, it will be very difficult for the
Fed to hike rates this year,'' said Matthew Strauss, a currency
strategist atRBC Capital Markets in Toronto. ``That means the market
has gotten a little bit ahead of itself pricing in rate increases, and
the dollar will come under pressure.''
Friday should see the final German
state CPI releases with a 3.3% y/y rate now very likely, though
scheduled data starts at 0645GMT with France May PPI (expected to come
in at 0.5% m/m, 5.9% y/y), followed shortly by France Q1 final GDP at
0650GMT (expected at 0.6% q/q,+2.2% y/y). Spain releases the May retail
sales index and June preliminary HICP data at 0700GMT, while 0800GMT
sees both Italy May hourly wages and the Eurozone April current account
data. The Eurozone June economic sentiment index and June business
climate indicator are also due at 0900GMT.
US data starts at 1230GMT, when personal income
is forecast to rise 0.4% in May. Payrolls fell 49,000, while the
average workweek was unchanged at 33.7 hours and hourly earnings rose
0.3%. PCE is forecast to rise 0.7%, as retail motor vehicle sales rose
0.3% in the month and non-auto sales jumped 1.2%. The core PCE
price index is expected to rise 0.2% after the 0.1% gain in April.
Canada industrial product and raw materials prices for May and average
weekly earnings, payrolls for April are due at the same time. At
1355GMT, the Reuters/University of Michigan Consumer Sentiment Index is
expected to be unrevised at 56.7 at the end of June.
At 1630GMT, ECB President
Jean-Claude Trichet, Governing Council member Mario Draghi and PBOC
Governor Zhou Xiaochuan are due to host a press conference, in Rome.