U.S. Dollar Strength Pushes Euro Lower, Growth Concerns Emerge From ECB

[DailyFx]

Bullish sentiment for the U.S. dollar pushed the euro lower to break below 1.4600 during the overnight session amid mounting inflationary concerns for Europe’s largest economy.



Talking Points
• Japanese Yen: Inflation Holds at Record High
• Pound: Holding Steady at 1.8350
• Euro: German Import Prices Fall Less than Expected, Supporting ECB’s Hawkish Outlook
• US Dollar: GDP and U. of Michigan Confidence on Tap

U.S. Dollar Strength Pushes Euro Lower, Growth Concerns Emerge From ECB

Bullish sentiment for the U.S. dollar pushed the euro lower to break below 1.4600 during the overnight session amid mounting inflationary concerns for Europe’s largest economy. As the ECB is scheduled to meet next week, market participants anticipate the central bank to hold the benchmark interest rate steady at 4.25% as upside inflation risks continues to dominate the

German import prices fell 0.8% in August, which was slightly lower than the 1.0% decline anticipated by market participants. Meanwhile, the annual rate held steady at the record high reading of 9.3%, which only supports the ECB’s hawkish rhetoric that upside risks to inflation remains high throughout the Euro-Zone. The breakdown of the report showed that prices excluding energy increased 0.5% from the previous month, which suggests that the central bank will not lower rates for the rest of the year amid falling oil prices. However, ECB voting member Lucas Papademos warned that the financial crisis leaves banks throughout the Euro-Zone more susceptible to shocks and credit risks, and noted that the downturn in the economy may last longer than expected.

Amid increased buying pressures for the U.S. dollar, the uncertainties surrounding the Bush Administration’s bailout plan has pushed traders to curb their risk appetite, which heightened the appeal of the low yielding Japanese yen. The yen strengthened to hit an intraday high of 105.23 against the greenback, but pull back slightly to hold around 105.40. At the same time, consumer price growth in Japan slipped to 2.1% from 2.3%, but continued to hold above the BoJ’s 2.0% limit for the second consecutive month. Furthermore, the core CPI, which excludes fresh foods, continued to hold steady at the record high of 2.4%. Despite inflationary concerns for the world’s second largest economy, BoJ Governor Masaaki Shirakawa reassured the markets that the economy will recover in the near-term as he expected upward price pressures to decline over the coming months on the back of falling oil prices.

The final GDP reading for the second quarter will kick off the U.S. economic calendar at 8:30 EST, and is widely expected to hold at 3.3%. However, any downward revision to the growth figures would fuel bearish sentiment for the dollar, and may lead the greenback to retrace the overnight gains. Meanwhile, the U. of Michigan consumer confidence index is anticipated to fall to 71.0 from 73.1, and may drag on the reserve currency as the growth outlook remains dim. However, further developments over the $700B bailout package are likely to have the biggest impact on the dollar as the whole world is watching to see how regulators will deal with the financial crisis.

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