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Tuesday August 15, 2006 - 20:40:15 GMT
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FOREX-Dollar falls on soft US inflation, growth data

FOREX-Dollar falls on soft US inflation, growth data
Tue Aug 15, 2006 4:08pm ET169

(Recasts, updates prices)

By Nick Olivari

NEW YORK, Aug 15 (Reuters) - The dollar slid on Tuesday after a survey showed producer prices were softer than expected in July, reinforcing a view that the Federal Reserve may not need to raise interest rates further to combat inflation.

The dollar slumped sharply after news the core U.S. Producer Price Index fell 0.3 percent in July, stripping out volatile food and energy prices, the first monthly decline since October and well below the rise expected by economists. For details, see [nN14285121].

"The dollar initially weakened on (PPI) to just above $1.28 and has since been sideways," said Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston. "A lower chance of a fed rate hike and a flat to inverted yield curve are not good for the dollar."

The euro was up 0.5 percent in New York at $1.2783 . The dollar was down 0.5 percent at 116.06 yen .

The euro was trading at 148.41 yen after touching another record high of 148.62 yen earlier in the session, according to EBS data.

The yen repeatedly plumbed new lows against the euro in past sessions amid signs Japanese economic growth may be slowing and the Bank of Japan is in no hurry to raise interest rates again after the first rise in six years last month.

Sterling gained 0.3 percent against the dollar to trade at $1.8933. The dollar fell 0.4 percent to trade at 1.2370 Swiss francs

Adding to the dollar's woes, a separate survey from the New York Federal Reserve showed manufacturing activity in August slowed to its weakest since June 2005. For details click on [ID:nN15338889].


The market showed little reaction to separate data on Tuesday showing that the United States attracted a net $75.1 billion of capital inflows in June, more than enough to finance that month's trade deficit of $64.8 billion.

Federal funds futures implied that the market was seeing a 36 percent chance that the Fed will raise interest rates again at its next meeting in September, down from a 42 percent chance just before Tuesday's data releases.

With other central banks including the European Central Bank expected to raise rates this year, an end to Fed tightening could make it more difficult for the United States to finance its deficit, hurting the dollar.

Some market watchers said the dollar's sell-off after the PPI data could be short-lived, given that consumer price data on Wednesday is expected to point to an uptick in inflation and increase expectations for an interest rate hike.

"We shouldn't exaggerate this," said Marc Chandler, chief global currency strategist for Brown Brothers Harriman in New York. "PPI is not nearly as important as CPI, which is not nearly as important as the core PCE measure that the Fed has identified."

The core PCE index, the Fed's preferred gauge of inflation, is currently running above the central bank's perceived comfort zone of 1 percent to 2 percent year-on-year growth, but policy-makers have said they expect slower growth to moderate price pressures.

If the Fed were to raise interest rates further to ward off inflation, that could attract more foreigners to dollar-denominated assets.

The Fed left interest rates on hold at 5.25 percent last week after raising them 17 straight times since June 2004, though it kept the door open for more credit tightening if price pressures persist.

(Additional reporting by Jamie McGeever and Amanda Cooper)

© Reuters 2006. All Rights Reserved.


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