The U.S. dollar weakened to a new 2-year low versus the euro this morning after a report showed core U.S. consumer prices rose by less than expected in March, supporting a view that U.S. interest rates may be set to move lower. The Labor Department stated that consumer prices rose 0.6 percent last month. Excluding food and energy costs, they expanded 0.1 percent, below economists' median forecast for a 0.2 percent increase. Another U.S. government report showed that the pace of home construction rose 0.8 percent in March to a rate that beat analysts' predictions, although the rise was well below the previous month's increase. Expect the dollar to remain on the defense throughout today??™s session as the market looks to data releases set for later in the week for additional clues on the health of America??™s economy.
The Euro hit a fresh two-year high against the US dollar overnight, driven higher by the release of US consumer price data.
The British pound rallied to $2 overnight, touching levels not seen for almost 15 years as news of accelerating British inflation last month stoked expectations of a further rise in borrowing costs from the Bank of England. Data showing a 3.1 percent annual jump in British consumer price inflation in March - the highest since comparable records began in 1997 - served as the impetus for the pounds appreciation. The psychologically significant two-for-one level was last touched just before the currency??™s ejection from the European Union's Exchange Rate Mechanism in September 1992. Currency market analysts believe that further pound gains are likely. A move above $2.01 would herald the highest level in over quarter of a century.
The Japanese yen continued to weaken across the board, primarily as a result of weak Japanese fundamentals and a continuation of the carry trade phenomena. In official commentary overnight, Japanese Finance Minister Koji Omi stated that recent moves in currency markets reflected not so much a fall in the yen as a rise in the euro. Omi repeated then often heard official line from Japanese finance officials, stating that currency levels should reflect economic fundamentals. The yen hit a record low versus the euro yesteray after a weekend meeting of Group of Seven finance officials expressed no concerns about the Japanese currency's weakness, prompting traders to load up on carry trades, in which investors borrow in low-yielding currencies such as the yen to invest in higher-return currencies.
The Chinese yuan closed slightly higher against the dollar overnight, stabilizing after its third-biggest one-day fall of the year on Monday as dollar supplies in the market felt a temporary pinch. Monday's fall came after the People's Bank of China set the yuan's daily mid-point at a post-revaluation high of 7.7220, indicating the market was at odds with the central bank's apparent willingness to let the yuan rise toward 7.7200. A recently reduced flow of dollars into the domestic foreign exchange market, as indicated by China's sharply lower trade surplus in March, meant that the yuan's appreciation could continue at the slower pace seen since February. Global weakness of the Japanese yen, whose movements often influence other Asian currencies, would also have a negative impact on yuan appreciation.
The Canadian dollar added to its near-five month highs against the US dollar this morning, as oil prices rose while weaker-than-expected U.S. inflation data kept the U.S. currency on the defensive. A one percent gain in crude oil futures and a 0.6 percent monthly rise in U.S. consumer prices gave traders few reasons to step away from the currency.
The Australian dollar consolidated within its recent range overnight, trading just below 17-year peaks against the U.S. currency as investors took a breather ahead of key data next week which could give fresh clues on domestic monetary policy. The currency is expected to be broadly supported by rising gold and commodity prices and increased demand for carry trades. On the economic data front, the currency was oblivious to a quarterly survey from National Australia Bank which showed Australian businesses reported strong trading conditions last quarter, generating more demand for labor and leaving the economy with little spare capacity.
The Mexican peso remained sidelined against the US dollar as Mexican equities consolidated after hitting record highs last week. In other economic news, Citigroup downgraded the country's benchmark stock index to "underweight??? after investors had overreacted to a pension reform law approved by Congress in March, which seemed to have no tangible short-term benefit. Mexican stocks have gained almost 11 percent in the last month, boosted in part by investor enthusiasm over an alliance in Congress, made public about mid-March, to overhaul the public sector pension system.
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