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CURRENCIES
Dollar drops on jump in inflation
Headline figure shows brisk increase in inflation
By Leslie Wines, MarketWatch
Last Update: 12:21 PM ET Oct. 14, 2005
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NEW YORK (MarketWatch) -- The dollar dropped from recent peaks Friday, after news that headline consumer inflation last month registered its largest advance in more than 25 years while consumer spending slowed.
Traders said there is talk of pressure on the dollar from institutions shifting acounts away from the scandal-rocked commodites broker Refco Inc.
The U.S. currency was last trading at 113.95 yen, down from 114.83 yen before the news. As recently as Thursday the dollar reached 115 yen.
The euro rose to $1.2084, contrasting with $1.1989 before release of the September CPI data, as well as the latest monthly retail sales. report.
The Labor Department said consumer prices rose a larger-than-expected 1.2%. See full story.
A record 12% rise in energy prices fueled the historic jump in consumer price index, but core inflation -- which excludes food and energy -- increased just 0.1%.
Economists were expecting the CPI to rise 0.9% and the core CPI to rise 0.2%, according to a survey conducted by MarketWatch. See Economic Calendar.
The dollar was hurt by the headline CPI figure because the currency market this week is focusing on the risks to U.S. economic growth posed by soaring energy prices and recent hurricanes, according to Michael Woolfolk, senior currency analyst at The Bank of New York.
"Normally, the dollar would rally because inflationary news feeds expectations of further rate hikes," he said. "But the dollar today is unable to retain its rally because of inflation concerns."
The mild core consumer inflation news actually detracts from the case for a more hawkish program of U.S. interest rate increases.
However, Federal Reserve officials' recent comments have left little doubt that the central bank is fixated on inflation and is likely to continue raising rates until at least the end of 2005.
Separately, the Commerce Department reported that U.S. retail sales rose 0.2% in September, after falling 1.9% in the previous month. See full story.
Economists were expecting a moderate 0.5% rise in retail sales in September. Sales ex-autos were forecast to rise 0.9%. See Economic Calendar.
The University of Michigan's consumer sentiment survey dropped to 75.4 this month from 76.9 in September. The MarketWatch forecast was for a rise to 80.4.
Woolfolk said the drop in retail sales and the dent in sentiment were worrisome to currency markets because the economy is heavily dependent on consumer spending.
There was scant reaction to news from the Federal Reserve that Hurricanes Katrina and Rita, and a strike at an aircraft producer, contributed to a 1.3% drop in industrial production in September.
It was the largest monthly drop since 1982. Economists surveyed by MarketWatch were expecting it to drop only 0.3%. Capacity utilization fell to 78.6 in September from a revised 79.8 in August.
Currency markets didn't react much to the fall in production because it is being viewed as a weather-linked, one-off event, Woolfolk said.
U.S. business inventories grew by 0.4% in August, matching a 0.4% rise in sales, according to the Commerce Department. The inventory-to-sales ratio remained at a record low 1.26 months.
Economists surveyed by MarketWatch were expecting inventories to rise 0.2% after a revised 0.4% decline in July.
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