Dollar slips, euro above parity before US inflation data

In this file photo taken on August 29, 2017 A picture taken on 29 August, 2017 in Arras, northern France, shows fifty euro banknotes on table. — AFP pic

In this file photo taken on August 29, 2017 A picture taken on 29 August, 2017 in Arras, northern France, shows fifty euro banknotes on table. — AFP pic

Wednesday, 13 Jul 2022 5:50 PM MYT

LONDON, July 13 — The euro edged higher today, hovering just above parity with the US dollar while traders focused on US data due later in the session that is expected to show inflation at a 40-year high.

European stock markets were in the red and the dollar index was down 0.2 per cent on the day at US$107.93 (RM478) at 1047.

The euro was up 0.2 per cent on the day at US$1.00595.

Yesterday, the euro had dropped as low as US$1.00005 on the most widely used Electronic Broking Services’ (EBS) dealing platform and it touched US$1 on Reuters dealing overnight.

Market-watchers were focused on US CPI data due later in the session. Economists forecast headline US inflation accelerated to 8.8 per cent year-on-year in June, a four-decade high.

But “core” CPI, which strips away volatile food and energy prices, is expected to repeat May’s 0.6 per cent monthly increase and cool slightly to 5.7 per cent year-on-year.

Higher-than-forecast inflation would reinforce expectations of Federal Reserve interest rate hikes and push the dollar higher — potentially causing euro-dollar to break parity, analysts said.

But traders will be looking for any signs of inflation having peaked as this could potentially convince the US central bank not to become more aggressive in its future rate hikes.

The euro is down nearly 12 per cent this year and fell to a 20-year low yesterday as the war in Ukraine has triggered an energy crisis that has hurt the continent’s growth outlook.

Germany has moved to stage two of a three-tier emergency gas plan and warned of a recession if Russian gas flows are halted.

“I see relative recession risks as the primary driver of the drop towards parity — Dutch gas futures are up 100 per cent over the last month, US gas futures are down 35 per cent. This is a clear negative for euro zone growth and is dragging the euro lower,” said Colin Asher senior economist Mizuho.

Derek Halpenny, head of research at MUFG, said in a client note that risk-off market moves due to increased global recession risks have “further to run”.

“We doubt that is the end of the move and see little reason for the US dollar to turn weaker at this juncture,” he said.

But Commerzbank analyst Antje Praefcke said in a note to clients that higher inflation data is no longer positive for the dollar in the long term because it could lead to the Fed “overshooting” in its rate hikes.

“Simply put, the faster rates rise now, the higher the likelihood of rapid rate cuts next year,” Praefcke said.

The pound was up 0.3 per cent versus the dollar at US$1.1923.

Britain’s economy expanded unexpectedly in May, driven by a rise in local doctor appointments and growth in other sectors although consumer-facing services fell slightly as inflation mounted, according to official figures.

Euro zone industrial production increased by more than expected in May, data showed.

The Japanese yen was a touch lower versus the US dollar at 137.02, having taken a beating in recent months due to the Bank of Japan’s ultra-easy monetary policy making it an outlier among major global central banks.

The Australian dollar — seen as a liquid proxy for risk appetite — was up 0.6 per cent at US$0.6795.

The New Zealand dollar was up 0.2 per cent at US$0.6148, having taken little support from a 50 bps interest rate hike by the central bank. — Reuters