Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The dollar strengthened against the euro Friday as investors shook off a surprising drop in U.S core inflation and focused instead on a U.S. economy that looks to be emerging from the doldrums faster than its peers.
The first drop since 1982 in core U.S. inflation earlier caused the dollar to briefly lose its footing against the euro, but the greenback regained its composure and continued its march against the common currency as the Federal Reserve's late-afternoon Thursday increase of emergency bank-lending rates again came to the forefront.
The dollar screamed higher against its rivals after the late Thursday Fed announcement, which increased discount interest rates by 25 basis points charged for emergency lending to banks, to 0.75%.
Investors took that as a signal the U.S. economy was improving at a faster rate than its rivals, with an increase in key U.S. interest rates coming sooner than expected, but Fed officials warned the discount rate increase was not a sign of broader monetary tightening.
"The underlying dollar sentiment is constructive," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "It stands on two legs: Poor developments in general in Europe...and more positive developments in the U.S."
Separately, the U.K. pound came under additional pressure--sinking to a nine-month low overnight--as much worse-than-expected January U.K. retail sales highlighted the headwinds facing a stressed U.K. economy.
Friday morning, the euro was at $1.3506 from $1.3527 late Thursday, according to EBS via CQG. The dollar was at Y91.76 from Y91.80, while the euro was at Y123.94 from Y124.25. The U.K. pound was at $1.5414 from $1.5575. The dollar was at CHF1.0848 from CHF1.0829.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 81.095 from 80.859.
Global stock markets declined on the Fed discount interest rate increase, and U.S. stocks opened lower, as the ultra-cheap dollars that have sloshed around the economy could become more expensive if the Fed increases the key interest rates that have been kept ultra-low to stimulate a stressed U.S. economy.
"Although far from a tightening step," said Geoffrey Yu, currency strategist at UBS in London, "the signaling effect" of the increased discount rates is clear, "with the Fed being perceived as pushing ahead with normalization well before other central banks," and on the road to eventually increasing the key U.S. rates that weigh on the dollar.
The late Thursday afternoon announcement caught markets off guard, sending the dollar strongly higher across the board, soaring to its highest level in nine months against the euro and sending the Dollar Index to its highest level since June.
Contrasting with a U.S. economy dragging itself the depths of the financial crisis, the U.K. registered a steep and unexpected drop in retail sales, sending the pound lower by more than 0.7% by New York trading.
The U.K. retail sales index, including fuel sales, fell 1.8% on the month and rose 0.9% on the year in January. That was the sharpest monthly drop since February 2009. Economists surveyed by Dow Jones Newswires last week were expecting a 0.5% monthly decline and a 1.1% annual gain.
Separately, Russia's central bank cut its key interest rates Friday for the first time this year in an effort to stimulate bank lending and combat the wave of speculative capital pushing up the value of the ruble.
The central bank cut the refinancing rate 25 basis points to a record-low 8.5%, effective Feb. 24. Other key rates will fall as well, the central bank said in a statement.
On Thursday, the central bank lowered the ruble's trading band against the euro-dollar basket for the first time since November, allowing the currency to hit a 13-month high of 34.91. The ruble strengthened to 34.83 against the euro-dollar basket Friday.
Canada Morning
The Canadian dollar was substantially lower Friday morning after the Fed raised its discount rate late Thursday.
The U.S. dollar was at C$1.0497 from C$1.0420 late Thursday.
Boosted by the Fed's discount rate hike, the dollar was able finally able to break through the C$1.0500 threshold after failing to do so on its own earlier in the week, said RBC Capital Markets.
"The focus is now on a somewhat wider 1.0438 to 1.0568 range, as the Fed's move adds some spice to USD trade," RBC said. "The recent retracement phase has stalled and we now watch the strength of rallies and resistance above 1.0550," it added.
The currency show no sustained reaction to news that retail sales rose 0.4% to C$35.3 billion (US$33.9 billion) in December, slightly below the expected 0.5% gain.
Statistics Canada also reported that the composite leading index rose 0.9% in January, the eighth consecutive gain, but marginally slower than the 1% the market had expected.
-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com
(Don Curren in Toronto and Ira Iosebashvili in Moscow contributed to this article.)
Copyright (c) 2010 Dow Jones & Company, Inc.
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