Dollar gains with inflation data on tap, euro falls after ECB

NEW YORK: The dollar index rose Thursday, reversing initial declines while the euro gave up earlier gains after the latest policy announcement by the European Central Bank (ECB), which signaled the bank was poised to begin raising interest rates.

The ECB ended a long-running stimulus program and said that next month it would deliver its first interest rate hike since 2011, followed by a potentially larger move in September as it seeks to tamp down rising inflation.

But a lack of any details for a plan about dealing with fragmentation concerns in the region helped send the euro lower against the dollar. The ECB has said that fragmentation, a divergence between borrowing costs for different European countries, hampers the execution of its monetary policy.

“The market reaction today was just silence is deafening – why didn’t we get anything with regards to fragmentation risk?” said Huw Roberts, head of analytics at Quant Insight.

“And since we didn’t get anything, as markets tend to do, we will find the path of most pain.” The dollar index rose 0.39% to 102.960, with the euro down 0.55% at $1.0655. The greenback is poised for its second straight weekly gain and biggest weekly gain in five.

Most central banks around the globe have been taking actions to stem the tide of rising inflation by hiking interest rates, and investors will get a look at the latest reading on US inflation on Friday in the form of the May consumer price index (CPI). The consensus forecast calls for a year-over-year inflation increase of 8.3%, unchanged from April.

US data on Thursday showed the labor market remains very tight, with weekly initial jobless claims rising to a seasonally adjusted 229,000 for the week ended June 4, the highest since mid-January, and above the 210,000 estimate.

The Fed is scheduled to announce its next policy statement on Wednesday and the market is completely pricing in a rate hike of at least 50 basis points from the central bank, according to CME’s FedWatch Tool.

In contrast, the Bank of Japan has been one of the few central banks not to take action on rising prices, which has caused the yen to drop to a two-decade low against the dollar and a 7-1/2 year low versus the euro. Governor Kuroda said on Wednesday that the yen weakening was positive to the economy as long as moves were stable, while adding that FX policy was not the authority of the BOJ.

The euro fell 0.6% against the yen at 142.990, just below a January 2015 high of 144.25 yen hit on Wednesday.

The Japanese yen strengthened 0.05% versus the greenback at 134.16 per dollar, while Sterling was last trading at $1.252, down 0.15% on the day.

In cryptocurrencies, Bitcoin last fell 0.28% to $30,104.20.