Dollar Drops Versus Euro on Speculation Fed Won’t Raise Rates

Feb. 19 (Bloomberg) — The dollar fell against the euro for the first week in almost a month as the Federal Reserve signaled its dissatisfaction with job growth, bolstering speculation it will be slow to increase interest rates.
The greenback dropped against most of its major peers as lower-than-forecast retail sales and a rise in jobless claims damped demand. The Swiss franc surged as investors sought safety amid Middle East turmoil, while the pound rose against the dollar and euro on speculation the Bank of England will raise interest rates. The U.S. economy grew faster in the last quarter of 2010 than first estimated, data next week may show.
“The Fed reiterated that they will maintain a high bar for rate raises,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “Diminished expectations for rate hikes have been U.S. dollar negative.”
The dollar fell 1 percent to $1.3693 per euro in New York, the first weekly loss since Jan. 21, from $1.3554 on Feb. 11. Europe’s shared currency rose a second week versus the yen, gaining 0.7 percent to 113.90 and touching 113.92, the strongest level since Jan. 27. The yen had its first five-day advance against the dollar since Jan. 28, gaining 0.3 percent to 83.18.
The euro gained yesterday against most major counterparts after a European Central Bank Executive Board member, Lorenzo Bini Smaghi, said policy makers may need to raise interest rates as global inflation pressures mount.
‘Degree of Accommodation’
“As the economy gradually recovers and global inflationary pressures arise, the degree of accommodation of monetary policy has to be monitored and, if needed, corrected,” Bini Smaghi said in an interview with the daily newsletter Bloomberg Brief: Economics.
The ECB has held its benchmark interest rate at 1 percent since May 2009.
U.S. policy makers “continued to express disappointment in both the pace and the unevenness of the improvements in labor markets,” while also judging the recovery to be on a “firmer footing,” the Federal Open Market Committee said in minutes of its Jan. 25-26 meeting, released Feb. 16. They were divided over whether further evidence of recovery would warrant slowing or reducing $600 billion in U.S. debt purchases to spur growth.
The central bank has left its key rate at zero to 0.25 percent since December 2008 to support the economy. Analysts forecast the rate will rise to 0.5 percent by year-end, according to the weighted average in a Bloomberg News survey.
The dollar had the biggest loss this week, 1.4 percent, among 10 developed-nation currencies in the Bloomberg Correlation-Weighted Currency Indexes.
Krone, Franc Gain
Norway’s krone, a currency linked to oil exports, and the Swiss franc, considered a haven currency, gained the most, the indexes showed. They rose 2.1 percent and 1.9 percent as unrest surged in the Mideast and oil prices climbed.
Egyptian state television said yesterday Iran won permission to sail two naval ships through the Suez Canal in a move Israel called a “provocation.”
“The warships can increase tensions potentially between Iran and Israel, and since Israel is one of the U.S.’s closest strategic allies, that can weigh on the dollar,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network.
Crude oil for March delivery increased 0.7 percent, the most in five weeks, to $86.20 a barrel in New York on concern supplies may be disrupted.
The franc gained for the week versus 15 of its 16 most- traded peers. It rose 3 percent, the most since Dec.3, to 94.46 centimes per dollar and was up 1.9 percent to 1.2935 per euro.
Top Performer
Norway’s krone was No. 1, climbing 3.2 percent to 5.6684 per dollar and touching 5.6654, the strongest in 13 months. It appreciated 2.2 percent to 7.7609 to the euro.
The 17-nation currency rose against the greenback on Feb. 17 as Labor Department data showed applications for unemployment benefits rose to 410,000 in the week ended Feb. 12, exceeding the 400,000 median forecast in a Bloomberg survey.
Retail purchases in the U.S. rose 0.3 percent last month, Commerce Department data showed on Feb. 15, the least since a drop in June. A Bloomberg survey forecast a 0.5 percent gain.
The U.S. economy expanded at a 3.3 percent annual rate from October through December, according to the median estimate in a Bloomberg survey before Commerce Department data due Feb. 25. The rate was estimated in January at 3.2 percent. It was 2.6 percent in the third quarter and 1.7 percent in the second.
Yields Fall
The yen strengthened versus the dollar this week as investors sought the safety of U.S. Treasuries, driving yields down and dimming the attraction of dollar-denominated assets. Yields on U.S. two-year notes decreased nine basis points, the most since the five days ended Sept. 17, to 0.75 percent.
Sterling climbed as pressure increased on the Bank of England to raise its key rate from a record low of 0.5 percent. A Feb. 15 report showed inflation accelerated to double the central bank’s 2 percent target. Bank Governor Mervyn King said the next day inflation will peak this year and ease in 2012. The pound strengthened 1.5 percent to $1.6253.
“Most commentators are at least mildly bullish on the pound,” said John McCarthy, director of currency trading at ING Groep NV in New York. “I’m not sure if it’s justified, because it’s based on rate expectations and King moderated that.”
China’s yuan reached a 17-year high versus the dollar on speculation the nation will allow faster appreciation to tackle inflation and appease trading partners who say it’s undervalued.
The yuan gained 0.21 percent to 6.5732 per dollar as Group of 20 finance ministers and central bankers opened a summit in Paris yesterday in an effort to agree on a common approach to global economic imbalances.
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net ; Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net