Sun, Oct 16, 2005 - Page 10 News List

Disappointing dollar falls, sparking rates speculation

AFP , NEW YORK

The US dollar tumbled on Friday as data showing tame US core inflation and disappointing consumer confidence suggested less aggressive moves by the US Federal Reserve on interest rates.

The euro rose to US$1.2070 from US$1.2020 late on Thursday in New York.

The dollar was meanwhile trading at ¥114.08 after ¥114.55.

While the latest report on inflation provided conflicting signals, the market viewed the report as largely tame.

The main consumer price index surged 1.2 percent last month, the steepest in 25 years, on a huge jump in energy costs. But the core rate, preferred by many economists, which excludes food and energy, increased just 0.1 percent rather than 0.2 percent as expected.

"Overall, this report provides preliminary evidence that energy-induced inflation concerns are not yet fanning out across the economy. Combined with evidence that fuel prices are past their peak, such a fanning out may never occur," RBC Financial Group economist Derek Holt said.

US Federal Reserve officials have recently placed so much emphasis on the risks to inflation, particularly the potential for "second round" effects from high oil prices, that the core CPI number took center stage, Daragh Maher at CALYON said.

"The reality is that the Fed through its rhetoric has succeeded in making inflation, not growth, the principal focus, which means the dovish signal from the inflation reading should dominate the hawkish retail sales release in terms of market reaction," he said.

Further bad news came later for the dollar with the release of very disappointing industrial production numbers and a weaker-than-expected key consumer confidence survey.

The University of Michigan's consumer sentiment index fell to 75.4 points this month from 76.9 last month.

The index fell sharply last month from a reading of 89.1 in August, in the wake of hurricanes Katrina and Rita, but economists had expected a rebound this month to around 80.4.

Kathy Lien at Forex Capital Markets said the overall impact of the data was bad for the dollar at a time when the euro appeared set for a possible rebound.

"Industrial production registered the biggest decline in 23 years while confidence took its third consecutive slide to the lowest level in 13 years," Lien said.

"Therefore taking everything into consideration, the news was far more bearish for the dollar today than the market may have anticipated," she said.

In late New York trade, the dollar stood at 1.2851 Swiss francs from 1.2891 on Thursday.

The pound was trading at US$1.7680 from US$1.7573 on Thursday.

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