Currency traders are not buying the US Federal Reserve’s view that the downward pressure on inflation is a temporary phenomenon.
The US dollar extended its longest slide since June this week after government data showed consumer prices rose at the slowest pace in three months last month. With oil tumbling to 2009 levels and China devaluing its currency, the outlook for quicker inflation looks bleak, threatening Fed plans to raise its target rate from near zero as soon as next month.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 of its major peers, slumped 0.7 percent from Aug. 14, its second straight weekly decline.
“If you’ve been dollar-bullish and negative on G-10 currencies, all of a sudden your expectation for a rate hike is pushed out,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California.
The US currency suffered its worst week since May against the euro, falling about 2.4 percent to US$1.1386. It tumbled the most since December versus Japan’s currency to ¥122.04.
A separate measure of consumer prices due next week will take on added importance, Trang said.
The personal consumption expenditures index, set for release on Friday, probably rose 0.3 percent last month from a year earlier, according to the median estimate in a Bloomberg survey.
US policymakers are targeting inflation of about 2 percent as they look to raise interest rates for the first time since 2006.
Investors scaled back expectations for an increase at next month’s Fed meeting after minutes from the central bank’s gathering last month showed officials scrutinizing inflation measures.
While the Fed reiterated that downward pressure on consumer prices would probably prove temporary, the comments preceded China’s shock yuan devaluation on Aug. 11. That has fueled the worst emerging-market currency rout since the financial crisis and prompted Bill Gross at Denver-based Janus Capital Group Inc to warn it will weigh on global inflation. As China’s yuan cheapens, it lowers the cost of its goods on overseas markets.
Traders see a 34 percent chance the Fed will raise interest rates at its meeting next month, down from a 48 percent probability at the end of last week, futures show. The gauge is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
“You don’t see enough inflation to convince the market that they’re going to move in September,” said Nick Kalivas, a senior equity product strategist at Invesco PowerShares, which has about US$97 billion in its funds.
POUND DESCENT
Meanwhile, the pound declined for a third week against the euro, the longest run of losses since April, as risk-averse investors bought the 19-nation shared currency.
Sterling fell to its weakest level since mid-June amid speculation the Bank of England would not raise interest rates until the middle of next year. Concerns Chinese growth is weakening, together with a decline in European stocks, prompted investors to unwind short positions they had previously taken out to bet on a weaker euro.
“There has been a general reduction in risk and risk taking,” said Hamish Pepper, a foreign-exchange strategist at Barclays PLC in London.
Betting on a euro decline has been a key trade for many investors, and so “the idea of reducing risk in an indiscriminate way means buying euros,” Pepper said.
As for the Bank of England, “nothing in our minds suggests they’re close to wanting to hike rates,” he said.
The pound weakened 1 percent to £0.7237 per euro as of 4:46pm on Friday in London, extending this week’s decline to 1.9 percent. Sterling was little changed on the day, and up 0.3 percent in the week, at US$1.5683.
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