By Peter Garnham
Published: March 2 2010 12:26 | Last updated: March 2 2010 12:26
The euro dropped to a fresh nine-month low against the dollar on Tuesday as data showed price pressures in the eurozone eased last month.
Figures revealed consumer price inflation eased to 0.9 per cent in February, down from 1 per cent in January and lower than consensus forecasts for no change.
EDITOR’S CHOICE
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Japan jobless rate falls more than expected - Mar-02
Ben May at Capital Economics said the rate was far lower than that in the US and UK and added that with plenty of spare capacity still in the eurozone economy, underlying inflationary pressures looked set to remain very subdued.
“We expect headline CPI inflation to ease back towards zero over the remainder of the year, suggesting that it will be a long while yet before the European Central Bank begins thinking about raising interest rates,” he said.
Maurice Pomery at Strategic Alpha said the problem for Jean-Claude Trichet, the ECB’s president, was how he was going to break the news to the rest of the central bank’s governing council that he needed to deal with the impending threat of deflation in the eurozone.
“Mr Trichet will be very happy to see the euro trade at $1.29 against the dollar,” he said.
Meanwhile, the euro also remained under pressure as concerns about Greece’s fiscal problems continued to unsettle investors.
The euro traded down to a low of $1.3432 against the dollar, its weakest level since May 18, before recovering some poise to stand down 0.2 per cent at $1.3538. The single currency also eased 0.2 per cent to Y120.51 against the yen.
The euro was flat at £0.9050 against the pound, however, as the pound continued to trade with a soft tone following Monday’s violent sell-off in the currency.
Paul Robinson at Barclays Capital said that despite the generally poor sentiment surrounding the pound, Monday’s sharp sell-off had caught investors by surprise.
He said he found it difficult to believe that such a sharp fall was because of opinion polls at the weekend that showed the UK faced the possibility of a hung parliament.
“Political uncertainty is an issue for the pound, given the large fiscal deficit, but that probably set the scene for the sharp fall, rather than drove it,” said Mr Robinson.
He said the reason behind the move itself appeared to be large trading flows, perhaps related to merger and acquisition activity.
“These then led to models selling the pound automatically,” said Mr Robinson. “Because the move caught many people out and prospects for the UK economy remain cloudy, we think there is likely to be further pressure on sterling.”
The pound, which on Monday tumbled to a 10-month low of $1.4780, eased 0.2 per cent to $1.4952 against the dollar and lost 0.3 per cent to Y133.12 against the yen.
Meanwhile the dollar was flat at Y89.08 against the yen but edged 0.1 per cent higher to SFr1.0810 against the Swiss franc.
Elsewhere, the focus of currency investors was on central bank policy decisions.
The Australian dollar failed to gain traction after the Reserve Bank of Australia, as expected, raised interest rate by 25 basis points to 4 per cent.
Adam Cole at RBC Markets said the Aussie dollar might have peaked, given its robust performance in recent months and the fact that another 90 basis points of monetary tightening were already priced into the interest rate market.
“We continue to favour selling rallies in the Australian dollar and are of the view that it has peaked in this cycle,” he said.
The Australian dollar was little changed at $0.9008 against the US dollar.
The Canadian dollar advanced, however, as traders awaited the Bank of Canada’s policy meeting later in the session.
The BoC was widely expected to keep rates on hold at 0.25 per cent, but traders said the accompanying statement would be widely scrutinised for any signal that the central bank would tighten monetary policy later in the year.
Speculation that the BoC would upgrade its assessment of the economy intensified on Monday after figures showed the Canada’s economy grew at its fastest rate since 2000 in the fourth quarter of last year.
The Canadian dollar climbed 0.6 per cent to a five-week high of $C1.0352 against the US dollar.
