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CURRENCIES : Dollar Softens As Inflation Report Disappoints

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08/11/2017 | 06:44pm CEST

By Sara Sjolin, MarketWatch , Anneken Tappe

Euro-sterling levels approach record high

The dollar traded down across the board following the release of July inflation figures which narrowly missed consensus estimates but showed an increase from the previous month.

The consumer price index climbed 1.7% on the year versus expectations of 1.8% and the June figure of 1.6%. Core inflation excluding food and energy came in at 1.7%, in line with estimates and June numbers.

The ICE Dollar Index , which measures the greenback against a basket of six rival currencies, dipped into negative territory following the data release, trading at 93.2170, down from 93.460 earlier on Friday.

Low inflation numbers have kept investors as well as the Federal Reserve on their toes, as disappointing numbers weighed on the possibility that the Fed could raise interest rates again or more aggressively.

The bearish reading today "could be another major blow to the dollar's outlook," according to Konstantinos Anthis, researcher at ADS Securities, before the inflation release. "Unfortunately for dollar bulls today's inflation report is more of a risk event for the buck rather than an opportunity to pick up pace."

"A softer reading would mean fresh trouble as it would remind investors that inflation remains well below Fed's target and suggest that a December rate hike might not be that likely after all," he said.

"The dollar had picked up over the past days amidst the scramble for safety," Neil Mellor, chief currency strategist at BNY Mellon said, adding that the winning streak was brought to an end by the disappointing CPI numbers earlier that gave way to a stronger euro.

The euro spiked on the back of the release, buying $1.1808, up from $1.1774 late Thursday in New York, while the pound briefly jumped to $1.2988, compared with $1.2978 on Thursday. Both currency pairs retreated from their initial highs earlier on Friday.

The euro also continued to strengthen against the Brexit-ridden pound, with one euro buying GBP0.9098 compared with GBP0.907 late on Thursday.

"Sterling is under an enormous amount of pressure," Mellor said. "We've seen very few EUR/GBP closes at this level."

The pair was last in GBP0.9 territory in November 2016. The OECD outlook said the U.K. was en route for slowing growth earlier this week as uncertainties about the post-Brexit economy remain.

Aside from U.S. data, the tensions between U.S. and North Korea remained a key focal point. President Donald Trump raised the stakes on Thursday, saying his earlier threat to unleash "fire and fury" on North Korea "maybe wasn't tough enough."

Additionally, China weighed in on the standoff, warning in an editorial in state-run Global Times (http://www.globaltimes.cn/content/1060791.shtml) that Beijing will intervene if the U.S. strikes first against North Korea.

That helped to push up currencies perceived as safer assets, like the Japanese yen and Swiss franc. The dollar fetched Yen109.04, slightly up Yen109.20 on Thursday, while the Swiss franc bought $1.0396, up from $1.0389.

Other Asian currencies, however, stumbled on fears of a conflict in the region. Against the South Korean won , the dollar dipped to 1,142.03 won on the inflation numbers, after initially rising to 1,146.41 won earlier on Friday versus 1,144.16 won on Thursday.

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