LONDON: The Canadian dollar fell to a five-year low and Norway's crown slid to a four-year trough against the U.S. dollar on Wednesday as investors fled the currencies of economies that are grappling with a drop in energy prices.
The Norwegian crown, which tends to have a good correlation to crude oil prices, also fell to a two-month low against the euro.
The euro slipped against the dollar, and with euro zone inflation expectations falling rapidly, traders said the single currency was likely to stay under pressure.
Euro zone inflation expectations, as measured by the five-year, five-year break-even forward, were below 1.80 percent. This is likely to cement the view that the European Central Bank may have to resort to quantitative easing sooner rather than later.
Adding to the gloom, China's inflation rate slowed more than expected in September, dropping to a near five-year low. The drop heightened concern that global growth is cooling, putting more pressure on governments to take bolder measures to shore up their economies.
The Canadian dollar's drop to a five-year low stood out in the European session. The U.S. dollar climbed to C$1.1375 , up 0.6 percent and its highest level since mid-July 2009. Traders said the renewed weakness in the Canadian dollar has been triggered by the weakening crude oil market, where prices have fallen below $85 a barrel.
"The more oil prices fall, the more dollar/CAD will rise," said Jeremy Stretch, head of currency strategy, CIBC World Markets, a Canadian bank. "We could see dollar rise to C$1.1420 if U.S. data doesn't disappoint."
The drop in oil prices also hurt the Norwegian crown. Against the euro, it fell to its lowest in two months at 8.4210 crowns while the dollar rose to 6.6492 crowns , its highest since mid-2010.
LACK OF INFLATION
The lack of inflationary pressure across many developed economies, helped in part by a 26 percent slide in oil prices since June, has knocked government bond yields lower.
Investors have pushed back expectations of a rate hike in the U.S., where rates futures suggest traders are not fully pricing in a Fed rate increase until January 2016.
Rate-hike expectations have also been pushed back in the UK, where a report on Tuesday showed British inflation hit a five-year low in September. Earlier this week, markets were pricing in a chance for a rate hike in the spring of 2015, but that has now been pushed back well into the summer.
Analysts said that while the Fed and the BoE may delay rate hikes, a sustained drop in inflation could prod the Bank of Japan and the European Central Bank to ease already ultra-loose monetary policy further to ward off deflation.
"It will exacerbate concern over low inflation, particularly where it is already well below central bank targets, which is most acute in Europe and in Japan, keeping pressure on domestic central banks to ease monetary policy further," said Lee Hardman, a currency analyst at Bank of Tokyo Mitsubishi.
The euro slipped to $1.2640, staying away from a nearly one-week high of $1.2770 on Tuesday.
The dollar also gained on the yen, with the greenback up 0.15 percent at 107.21 yen. Investors were looking to U.S. retail sales data, the Empire manufacturing index and producer price data later in the day for more cues.
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