By Tommy Stubbington and James Ramage
The dollar continued to surge Tuesday, buoyed by a slump in the
euro as eurozone inflation sank to a five-year low.
The latest sign of sluggish price growth in the euro area is
likely to crank up the pressure on the European Central Bank to
further ease monetary policy, at a time when investors perceive
that the U.S. Federal Reserve is edging toward raising interest
rates.
Tuesday's gains were a continuation of the dollar's strength
against the common currency, as a diverging outlook for the U.S.
and Europe have supported the dollar while pushing the euro lower.
The U.S. economy appears to be recovering, raising the possibility
of higher interest rates and an end to dollar-crushing stimulus
measures, while the eurozone struggles with sliding prices. The
euro shed about 7.7% against the dollar in the third quarter, which
ended Tuesday.
Early in the Americas session, the common currency pushed 0.9%
lower against the buck to $1.2571, the lowest since September 2012.
By the afternoon, the euro was down 0.4% at $1.2630.
Analysts said the decline in the euro triggered broader dollar
strength, with the greenback rising 0.2% against the yen, to 109.66
yen, while the British pound slipped 0.2% versus the buck to
$1.6213.
Consumer price inflation in the eurozone fell to 0.3% in
September, data showed Tuesday. That marks the slowest rate since
October 2009 and a fall even farther below the ECB's target rate of
close to 2%.
"Given how important inflation readings are to the ECB's
thinking, this figure will be a source of concern," said Phyllis
Papadavid, a currency strategist at BNP Paribas. "We could see a
more aggressive message at this week's meeting."
The central bank, which will make its October policy
announcement on Thursday, has already stepped up efforts to head
off the threat of deflation, with a surprise interest-rate cut in
early September and plans to purchase bundles of private debt. But
many analysts think the central bank will eventually have to opt
for large-scale purchases of government bonds-known as quantitative
easing-to pull the currency bloc out of its malaise. That prospect
would further weaken the currency.
Meanwhile, the Fed will take its cues from a raft of indicators
scheduled to arrive this week starting Wednesday. Specifically, the
central bank will pore over numbers for wage growth and workforce
participation within the Labor Department jobs report for
September.
"We could see a pullback in the dollar, particularly if nonfarm
payrolls come in below expectations on Friday," said Sireen
Harajli, foreign-exchange strategist at Mizuho Bank. Soft
employment numbers could persuade the Fed to delay raising interest
rates as the U.S. economy recovers.
However, the dollar's fundamentals remain strong, so any decline
would be temporary, Ms. Harajli said. "Right now there's every
reason to buy the dollar and every reason to sell the euro."
For the third quarter, the dollar rose about 8.2% against the
yen, while the British pound fell about 5.3% against the U.S.
currency.
The Australian dollar, threatened by the possibility of higher
interest rates in the U.S., fell about 7.2% against the greenback.
The Aussie, as it is known, has benefited from U.S. interest rates
near zero, which encouraged investors to borrow in U.S. dollars,
sell those and then use the proceeds to buy assets denominated in
the Australian currency.
--Write to Tommy Stubbington at tommy.stubbington@wsj.com and
James Ramage at james.ramage@wsj.com