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FOREX-Dollar gains post-Fed while euro slides on inflation data

Julie Haviv
Thursday, 31 Oct 2013 | 9:50 AM ET

* Dollar index hits two-week high

* Euro zone inflation at four-year low, unemployment high

* Market unwinds dollar shorts after Fed announcement

* US jobless claims drop in latest week

NEW YORK, Oct 31 (Reuters) - The dollar on Thursday rose for a fifth straight session against a basket of major world currencies to hit a two-week high, buoyed by the Federal Reserve's latest outlook which was perceived as less dovish than expected.

The euro tumbled to a two-week low against the greenback after a fall in inflation to its lowest in nearly four years raised speculation the European Central Bank will further ease monetary policy.

The dollar index, which measures the greenback against six currencies but is dominated by the euro, reached 80.080, its highest since Oct. 17, pulling further away from a nine-month low of 78.998 hit on Friday. It last traded up 0.3 percent at 80.024.

Short dollar positions, bets that profit when the dollar drops, taken in recent weeks were unwound after the Fed dropped a phrase in its statement on Wednesday expressing concern about a run-up in borrowing costs and made no direct reference to the partial government shutdown earlier this month.

The Fed also maintained its $85 billion per month of bond purchases, intended to prop up the economy.

"In this environment markets are nervous," said Camilla Sutton, chief currency strategist at Scotiabank.

"We would caution dollar bears as some (news) articles are suggesting that a December taper is a real possibility, so there is some added upside risk to the dollar, particularly since the market is now positioned for a first half 2014 taper," she said.

Sutton said month-end rebalancing flows should not play a significant role on Thursday, noting a minimal need for equity portfolio managers to rebalance.

The dollar held steady after data showed the number of Americans filing new claims for unemployment benefits declined largely as expected last week as the impact of a California computer glitch worked its way out of the report.

"The market was expecting a relatively dovish outcome from the Fed and that's why we've seen some profit-taking. People had become too bearish on the dollar and too bullish on euro/dollar," said Arne Lohmann Rasmussen, head of foreign exchange research at Danske Bank.

Meanwhile, the euro fell for a fourth straight session versus the dollar, hitting a trough of $1.3631, its lowest since Oct. 17. It last traded at $1.3634, down 0.7 percent.

Euro zone flash annual HICP inflation fell to just 0.7 percent in October. This may raise concerns among euro zone policymakers about deflation risks and damage to the economy from a strong currency. Euro zone unemployment was steady at a record high of 12.2 percent in September.

ECB governing council member Ewald Nowotny said earlier on Thursday the central bank would provide more liquidity when cheap long-term loans it made in late 2011 and early 2012 expire.

"We have had a nasty combination of a lack of inflationary pressures and record unemployment, and the market's interpretation is that the ECB may sit up and take notice," said Jeremy Stretch, head of currency strategy at CIBC.

"The downside risks for euro/dollar look evident and $1.36 is a near-term target."

The dollar fell 0.2 percent to 98.26 yen. Weaker equity markets helped the safe-haven Japanese currency even as three Bank of Japan board members dissented against the latest semi-annual report, with some citing stronger downside risks to the economy.

The Australian and New Zealand dollars also gained against their U.S. counterpart on strong Australian housing data and after the Reserve Bank of New Zealand reiterated it was likely to hike interest rates next year.