Aug. 19 (Bloomberg) -- The dollar declined against the euro and yen this week
as signs of slowing inflation and waning consumer confidence reduced
expectations the Federal Reserve will raise borrowing costs again this year.
The U.S. currency also slumped against the Swiss franc, Swedish krona and South Korean won after government reports on easing producer and consumer inflation prompted traders to reduce bets on further Fed rate increases. Rising interest rates typically make dollar-denominated assets more attractive to international investors.
``The main driver of the dollar this week was tame inflation news,'' said Nick Bennenbroek, vice president of foreign exchange research at Brown Brothers Harriman & Co. in New York. ``We're reaching the end of the Federal Reserve's hiking cycle and that's going to be a negative for the dollar.''
Against the euro, the dollar dropped 0.8 percent to $1.2825. The U.S. currency slumped 0.4 percent to 115.80 yen. It's down 7.6 percent this year against the euro and 1.7 percent versus the Japanese currency.
A Labor Department report on Aug. 15 showed wholesale prices excluding food and energy fell 0.3 percent last month, the first decline since October. The agency said the next day that core consumer prices excluding food and energy rose 0.2 percent in July, the smallest increase since February.
Measures of U.S. consumer confidence and new home construction both weakened more than forecast, signaling slower growth. Housing starts fell 2.5 percent to an annual rate of 1.795 million, the lowest level since November 2004, the Commerce Department said Aug. 16. Building permits, a sign of future construction declined 6.5 percent, the most since September 1999.
`Off Its Perch'
``The signs of economic weakness have definitely knocked the dollar off its perch,'' said Mitul Kotecha, global head of currency strategy in London at Calyon, the securities unit of Credit Agricole SA. ``It will continue to weaken, though the decline might not be that rapid.''
The U.S. currency gained about 14 percent against the euro last year as the Fed boosted borrowing costs. The central bank left its target rate for overnight loans between banks unchanged last week at a policy meeting for the first time in two years, citing slowing housing markets, prior rate increases and higher energy costs.
The prices of fed fund futures contracts at the Chicago Board of Trade suggest the likelihood of the Fed raising rates to 5.5 percent by the end of the year fell to about 50 percent this week, from about 90 percent before the inflation reports. Expectations for a rate boost at the Fed's Sept. 20 policy meeting have dropped to about 16 percent.
Consumer Sentiment
Adding to the expectations of stead rates was the University of Michigan's preliminary index of consumer sentiment, which declined to 78.7 in August from a July reading of 84.7. It compared with the median forecast of 83.8 in a Bloomberg News survey. The measure has averaged 88.1 since monthly data were first compiled in 1978.
``The index indicated weakening consumption and slowing growth,'' said Naomi Fink, chief North American currency strategist at BNP Paribas Securities in New York. ``I think the Fed will stand on hold throughout the rest of the year.''
The yen fell rebounded from a record low versus the euro yesterday after China's central bank raised lending rates to cool growth. Higher borrowing costs will put pressure on the yuan to strengthen, investors said.
``As China sucks in more imports from Japan, this will benefit the yen,'' said Robert Fullem, vice president of U.S. corporate FX sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``There is a standard view that increasing domestic consumption in China may increase imports from Japan and other Asian countries.''
The People's Bank of China raised the one-year lending rate to 6.12 percent from 5.85 percent, according to a statement on the Beijing-based bank's Web site. The one-year deposit rate was raised to 2.52 percent from 2.25 percent, the first increase in almost two years.