The dollar fell to a 15-month low against a basket of currencies today, with sterling among the biggest gainers after a rise in UK inflation increased the chances of a UK interest rate hike sooner rather than later. Relative interest rate expectations also lifted the euro to its highest against the dollar this year, but a reported options barrier and a sharp sell-off in euro/sterling following the UK inflation data capped its gains. Consumer prices in the UK last month rose by 4.4 percent, a 28-month high, and more than double the Bank of England’s mid-point target of 2 percent. Money markets are now fully pricing in a quarter point rate hike from the Bank of England in July, versus August before the data. Markets now await tomorrow’s release of the budget and the last BoE meeting minutes. The dollar index, a measure of the greenback’s value against a basket of six major currencies, fell 0.2 percent to 75.254, the lowest since December 2009.   The euro remains well supported by comments from ECB President Jean-Claude Trichet and other ECB policymakers, reiterating their stance they are ready to act quickly to guard against inflation. Most economists expect a rate hike next month. German two-year bond yields have risen around 30 basis points over the past week to 1.75 percent, widening the gap over U.S. Treasury yields to around 110 basis points. The euro also drew support from a relatively strong Spanish T-bill auction, where demand rose and the yield fell compared with the last sale.
The yen, meanwhile, was little changed on the day and continues to trade in a tight range. Traders were wary of further intervention from the Group of Seven to counter yen strength, but reported nothing so far. Friday’s coordinated intervention totalled JPY 530 billion vs. the JPY 2 trillion of the BoJ solo intervention in September 2010. The markets interpret this as there is more intervention to come. Japan again warned it would act to keep the yen in check, but traders saw no action in the FX market on Tuesday from Japanese or other G7 authorities. That resolve could be tested if dollar/yen looks like breaking back below 80 yen. Yen volatility has eased significantly since late last week, and some analysts said calmer markets in the coming weeks would decrease the need for Tokyo to smooth any appreciation in the Japanese currency, even if the dollar creeps below 80 yen.   The Canadian dollar fell against the US dollar on disappointing January retail sales data, and below forecast February leading indicators. Canadian retail sales unexpectedly dropped by 0.3 percent in January from December, pushed down by lower sales at new car dealers. Furniture and home furnishing stores reported a 2.3 percent decline in January. The largest increase in terms of value came in the food and beverage subsector, which rose by 0.7 percent. Sales were off in seven of 11 subsectors, representing 55 percent of total retail sales, and fell in four major provinces, which account for 85 percent of total retail sales. Sales excluding autos and parts were flat, while sales in volume terms dropped by 0.6 percent. Canada’s composite leading indicator rose 0.8 percent in February from January, in part due to new-found strength in the manufacturing sector, Statistics Canada also said today. Analysts surveyed by Reuters had forecast, on average, an increase of 0.7 percent. In manufacturing, new orders for durable goods increased by 1.0 percent after three straight declines. Statscan linked this to a marked improvement in exports in December. Stock market prices, boosted by the energy sector, rose by 2.7 percent for their sixth straight monthly advance.

Jim Watson

U.S. Bank