Dollar declines as inflation data reaffirms Fed low rate policy

Emerging Markets

Demand for emerging-market currencies is waning on speculation faster growth and slowing stimulus in the U.S. will boost demand for assets denominated in the dollar at a time when economies from South Africa to Turkey are cooling. The lira has also slumped as the government struggled to contain a corruption scandal, while the rand has been diminished by concern that labor-market instability at its mines will hurt exports.

In Australia, jobs decreased by 22,600 last month, following November’s revised 15,400 gain, the statistics bureau said today. That compares with a 10,000 increase predicted by economists. The unemployment rate held at 5.8%, the highest in four years.

The market-implied probability that the Reserve Bank of Australia will reduce its record-low benchmark interest rate by July rose to 43% from 24% yesterday, swaps data compiled by Bloomberg show.

‘Easing Bias’

“We continue to estimate the fair value of the Aussie in the low-to-mid 80s,” said David Forrester, a senior vice president for Group-of-10 foreign-exchange strategy at Macquarie Bank Ltd. in Singapore. “The RBA will maintain an easing bias but it will want to sit back and let the Aussie dollar do some of the work.”

Australia’s dollar slid 1.2% to 88.05 U.S. cents after falling to 87.77, the weakest since August 2010. The Aussie dropped 1% to NZ$1.0587 after trading at NZ$1.0567, the lowest since December 2005.

The dollar dropped as the consumer-price index rose 1.5% in the past year, below the Federal Reserve’s 2% target. It gained 0.3% in December, the biggest advance since June and followed no change the prior month, a Labor Department report showed today in Washington. It matched the median forecast of 87 economists surveyed by Bloomberg.

The core measure of U.S. consumer prices, which excludes food and fuel, rose 0.1%, restrained by a record decrease in medical commodities including prescription drugs.

Jobless Claims

Jobless claims decreased by 2,000 to 326,000 in the week ended Jan. 11 from a revised 328,000 in the prior period, a Labor Department report showed in Washington. The median forecast of 51 economists surveyed by Bloomberg called for 328,000. A Labor Department spokesman said no states were estimated and there was nothing unusual in the data.

The number of people continuing to receive jobless benefits jumped by 174,000 to 3.03 million in the week ended Jan. 4, the highest since July.

“It’s still broadly a constructive backdrop for the dollar, particularly against those emerging-market currencies, which are reliant on hot-money inflows,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London.

While trimming stimulus at its meeting on Dec. 18, the Fed reinforced its assurance that interest-rate increases are far off by saying its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5%.”

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