Inflation fears rattle currencies (page 1 of 2)

Euro

Disappointing German business confidence survey and persistent worries over the implication of a "no" vote in France's referendum on the EU constitution next month kept the euro under pressure.

The Ifo institute's gauge of German business confidence fell for the third consecutive month in April, dropping to its lowest level in more than 18 months in a sign of continued weak economic growth. The headline index slipped 93.3 in April from 94.0 in March.

The dollar however scored broad gains the following day, helped by reports that showed U.S. new home sales surged to a record pace, pacifying some concerns about a slowdown in the U.S. economic recovery that had pressured the currency against the euro and the yen.

The much awaited U.S. consumer confidence measure came in lower at 97.7 against forecasts of 98.0, but received no major reaction as market players had already discounted a weaker reading, given the high energy prices and falling stock markets.

The dollar continued to hold on to its gains as traders grappled with data showing slower-than-expected U.S. growth in the first quarter and at the same time signs of rising inflation. A surge in inflation fuelled expectations that the Federal Reserve might quicken the pace of U.S. interest rate rises, enhancing the allure of dollar-denominated assets.

This helped offset the market's disappointment over 3.1 percent annualised economic growth in the first quarter, below forecasts of 3.6 percent and the slowest rate of growth in any given quarter for the past two years.

The overall implicit GDP price index came in higher than expected at 3.2 percent, although the year-on-year growth in core personal consumption expenditures (PCE) was a still subdued 1.6 percent.

The greenback dipped on the last trading day after the University of Michigan's April consumer sentiment reading came in at 87.7, undershooting economists' consensus forecast for a reading of 89.0. But the Chicago Purchasing Management April index supported the dollar at 65.6 above forecasts of 63.9.

In the coming week, all eyes will focus on the U.S. Federal Reserve Committee meeting scheduled for Tuesday, where members are widely expected to agree on a further interest rate rise. Investors will also scrutinise U.S. jobs and manufacturing data next week for clues on the pace of further U.S. interest rate hikes.

The Fed's willingness to raise rates, currently at 2.75 percent after seven rises, could be tempered by a recent patch of soft consumer data and corporate results, which also weighed on the dollar this week.

In the eurozone, markets will focus on April's Manufacturing PMI on Monday and the service sector PMI on Wednesday for broads signs concerning the region's economic health.

Range for this week: $1.2750-$1.3050

Yen

The Japanese yen leapt to a two-month high against the euro and one-month high versus the dollar as speculation intensified that China might soon revalue its currency.

Any revaluation of the Chinese yuan, which has been pegged near 8.28 to the dollar for the last decade, is expected to spark a broad rally in Asian currencies. In a flurry of comments, Chinese officials said the country was better prepared to loosen its currency peg although they did not give a time frame to do so.

Speaking at the start of the week, the deputy chief of China's foreign exchange regulator Wei Benhua said the country would "positively but prudently" speed up the reform of its currency peg.