FOREX-Dollar rises ahead of U.S. inflation data, euro weak below $1.35

Tue Jul 22, 2014 7:02am EDT

Related Topics

* Dollar jumps ahead of U.S. inflation data

* Aussie boosted after central banker keeps quiet on recent strength

* Yen posts modest losses vs dollar, euro

* EU foreign ministers meeting eyed for message to Russia (Recasts with dollar gains, new quotes)

By Patrick Graham

LONDON, July 22 (Reuters) - The dollar rose to its strongest against the euro in almost six months on Tuesday ahead of U.S. inflation numbers for June which should add to a picture of growing divergence between the U.S. and European economies.

The data, due at 1230 GMT, is expected to show consumer prices in the United States rose by just over 2 percent last month, roughly stable and in line with the Federal Reserve's target but dwarfing almost zero price growth in the euro zone.

That would support economists' arguments that U.S. interest rates are certain to rise much earlier than those in Europe, raising the premium for holding dollars and at some stage pulling the dollar higher.

"Yield spreads have been moving against the euro for some time and probably this is a trend that is likely to continue," said Lee Hardman, a strategist with Bank of Tokyo Mitsubishi-UFJ in London.

"This move today is more technical than anything else. $1.35 looks like a bit of a pivot point and the pressure against the euro has been building."

The euro was down 0.3 percent on the day against the dollar, with traders citing support at $1.3475. The single currency was last weaker than that level in November of last year.

The U.S. currency was similarly higher against the Swiss franc, both a safe haven for money worried by events in Ukraine and Gaza in recent days and a huge gainer over the past five years. The dollar traded at 0.9012 francs, helping push the index to its highest since early June.

COME ON AUSSIE COME ON

The threat of a new and deeper round of sanctions against Russia over its involvement in Ukraine has been hanging over the euro in particular. EU foreign ministers meet on Tuesday to decide how precisely to deploy sanctions agreed 10 days ago.

The number of Russian individuals and companies to be penalized is unclear so there is scope to adopt a tougher posture, but that is expected to stop short of the sweeping sectoral moves being called for by Washington.

"The best case scenario for markets is if soft diplomacy is the preferred course of action amid hopes that the threat of harsher actions could encourage cooperation," analysts from French bank Credit Agricole said in a morning note.

"In the near-term, any flare-up in tensions is likely to spur support for the dollar and the yen."

A gain for the Australian dollar had been the main move on developed currency markets in Asian time, after the country's central bank chief said he was happy with current interest rate levels and made no attempt to talk down the currency.

The Aussie has gained steadily since hitting an almost four-year low at the start of this year, driven by signs of improvement in its domestic economy and an easing off, at least for now, of nerves over Chinese growth.

Governor Glenn Stevens, who has in the past engaged in verbal intervention to support growth, said he was content with the current level of interest rates, prompting markets to pare back slightly bets on another cut in rates this year. Data on Wednesday is also expected to show inflation topping its 2-3 percent target.

"Governor Stevens chose not to talk down the currency, as has been the central bank's wont in past months, and that boosted the Australian dollar," said Jane Foley, a strategist at Rabobank in London.

"That said, I doubt the bank feels particularly confident in the Australian economy's recovery as yet. Until we see greater signs of capital investment coming through, the Aussie will be vulnerable at these levels."

The Aussie traded 0.2 percent higher at $0.9392. (Editing by Catherine Evans)

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