FOREX-Euro drops after inflation reading, lifts dollar index past 100
* Euro below $1.06, investors wary before ECB meets
* Short euro positions widely held
* Dollar recovers after weak ISM data
LONDON, Dec 2 The euro fell towards a 7 1/2-month low against the dollar on Wednesday, after a soft inflation reading from the euro zone bolstered bets that the European Central Bank would ease monetary policy aggressively this week.
Headline inflation across the 19-member euro area was steady at an annualised 0.1 percent in November, below expectations for 0.2 percent and well short of the bank’s target of a rate just below 2 percent. That keeps in play bets the central bank will cut rates deeper into negative territory, weighing on sentiment towards the euro.
The euro’s dip lower helped the dollar recover ground lost after data showed U.S. manufacturing contracted in November for the first time in three years. The Federal Reserve is still expected to raise rates later this month, but the report struck a jarring note nonetheless.
“The euro has enjoyed a bit of a bounce, but going into the meeting, investors are confident that the ECB will not disappoint,” said Alvin Tan, currency strategist at Societe Generale. “Investors will also keep an eye on what (Fed Chair Janet) Yellen has to say.”
The euro was down 0.4 percent at $1.0593, with Monday’s 7 1/2-month trough of $1.0557 in sight.
“European corporates are generally exporters so they are happy with the euro going down but they have the feeling they should take profit at $1.05,” said Gian Marco Salcioli, head of FX sales at Intesa Sanpaolo Banca IMI. “But European importers just want to buy the dollar at any dip.”
The dollar index rose 0.3 percent to 100.07, not far from a 8 1/2-month high of 100.310 set on Monday. The index hit a 12-year peak of 100.390 in March.
The index, which tracks the dollar against a basket of rival currencies, rallied 3.3 percent last month on expectations the Federal Reserve will raise interest rates at its Dec. 15-16 policy review.
Yellen has public appearances on Wednesday and Thursday at a high-profile economics group and before a joint committee of Congress. She may remind investors that while the Fed is ready to act, further increases are likely to be gradual.
Against the yen, the dollar rose to 123.08 yen, moving back toward Monday’s high of 123.34. It has been little changed against the yen since hitting a three-month high of 123.77 in mid-November.