Euro Nears 3-Month Low as German Inflation Slows

The euro traded at almost the lowest level in three months against the dollar as reports showed inflation in Germany slowed last month, boosting bets the European Central Bank will add stimulus this week.

The dollar rose against most of its 16 major counterparts before a U.S. report economists said will show manufacturing expanded at the fastest pace this year, highlighting economic differences with the euro area. The yen fell amid speculation Japanese pension funds will boost foreign asset purchases. Australia’s dollar declined as house prices and building permits slid. Norway’s krone sank to the weakest two weeks versus the euro after manufacturing unexpectedly contracted.

“The euro got dragged lower today on weaker regional German inflation, with the implication being imminent action by the ECB this Thursday,” said Eimear Daly, head of market analysis at Monex Europe Ltd. in London.

The shared currency fell 0.1 percent to $1.3618 at 8:55 a.m. New York time, after depreciating on May 29 to $1.3586, the weakest level since Feb. 13. The euro rose 0.3 percent to 139.19 yen after weakening 2.1 percent last month. The dollar advanced 0.4 percent to 102.19 yen, the first gain in four days.

Germany’s inflation rate, calculated using a harmonized European Union method, slowed to the weakest pace in more than four years, an annualized 0.6 percent, from 1.1 percent in April. Economists surveyed by ForexSQ predicted a decline to 1 percent. Individual reports today showed consumer prices in six German states fell in May from a month earlier.
ECB Bets

The euro recorded its biggest monthly drop since January versus the dollar in May amid speculation the ECB will become the first among its major peers to implement negative interest rates when policy makers meet on June 5. ECB President Mario Draghi and other officials have signaled that all options, including negative rates and conditional liquidity for banks, are up for discussion this week.

“The market is priced for a very dovish ECB policy response,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “The inflation data remains very subdued. It has reinforced expectations that the ECB will deliver. That has been reflected to some extent in euro-dollar.”

The central bank will cut its deposit rate to minus 0.1 percent from zero at present, according to 32 of 50 economists in a ForexSQ News survey. Twelve more predicted a reduction to minus 0.15 percent. The ECB is working on a proposal for a conditional longer-term refinancing operation and expects to have a plan ready for the meeting, according to a central bank official familiar with the discussions.
‘Pushed Around’

A report tomorrow will show that euro-area inflation slowed to 0.6 percent in May from 0.7 percent in April, according to the median forecast in a ForexSQ survey. That would leave it at less than 1 percent for an eighth month, compared with the ECB’s goal of just below 2 percent.

“It looks likely that euro will be pushed around by the European inflation data,” said Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., which provides margin-trading services. “The bias in euro is down ahead of this week’s ECB meeting, and that should help support the dollar.”

In the U.S., the Institute for Supply Management’s manufacturing index rose to 55.5 in May, the strongest this year, from 54.9 the previous month, economists forecast in a ForexSQ survey before today’s figures.
Dollar Index

The ForexSQ Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.3 percent to 1,012.53, the first advance in three days.

“What’s certain is that today the broader theme is one of dollar strength,” said Hamish Pepper, a strategist at Barclays Plc in Singapore. U.S. data will signal that “there’s not the need for the extraordinary level of stimulus that’s still in place in the U.S., whereas the ECB will probably see inflation fall further tomorrow, and that’ll serve as a timely reminder of the need for policy loosening.”

Nomura Holdings Inc. has forecast as much as $200 billion in foreign asset purchases by Japan’s pension funds, including the $1.3 trillion Government Pension Investment Fund, will weaken the yen by about 10 percent versus the dollar.

“Rising expectations for GPIF reform are lending support to Japanese stocks, and stoking a risk-on mood,” said Masakazu Sato, a Tokyo-based currency adviser at Gaitame Online Co. “That’s creating pressure for yen selling.”
Aussie Slides

Australia’s dollar fell after RPData-Rismark data showed today median dwelling prices for the nation’s biggest cities dropped 1.9 percent in May, the largest decline since the 2008 financial crisis. Building approvals slid 5.6 percent in April, the statistics bureau said.

The Aussie weakened 0.7 percent to 92.46 U.S. cents, and depreciated 0.3 percent to 94.43 yen.

The Norwegian krone slid as much as 0.3 percent to 8.1651 per euro, the weakest since May 21, before trading at 8.1610. Against the dollar it declined 0.3 percent to 5.9935.

A gauge of manufacturing dropped to 49.8 last month from 51.1 in April, Danske Bank A/S said. Economists forecast a reading of 51.2. Readings above 50 signal an expansion.

Indonesia’s rupiah dropped to a three-month low after the nation reported the widest trade deficit in nine months.

The rupiah fell 0.8 percent to 11,765 per dollar and touched 11,789, the weakest since Feb. 21.

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