Dollar revives, oil price drop hits Canadian, Norwegian currencies

October 15, 2014

London (Oct 15)  The dollar hit a five-year high against the Canadian dollar and a four-year peak against Norway's crown on Wednesday as investors grew bullish again and shunned currencies grappling with falling oil prices.

The Norwegian crown, which has a good correlation to crude oil prices like the Canadian dollar, also fell to a two-month low against the euro

The euro eased a bit against the dollar, and with euro zone inflation expectations falling rapidly, traders said the single currency was likely to stay under pressure against the greenback. Falling inflation expectations are likely to cement the view that the European Central Bank may have to resort to quantitative easing sooner rather than later.

Adding to the gloom, China's inflation rate slowed more than expected in September, dropping to a near five-year low and heightening concerns that global growth is cooling, raising the pressure on governments to take bolder measures to shore up their economies.

The Canadian dollar's drop to a five-year low stood out in the European session. The U.S. dollar hit a high of C$1.1352, up 0.6 percent and its highest level since mid-July 2009.

Traders said the renewed weakness in the Canadian dollar has been triggered by the ongoing selloff in the crude oil market, where prices have fallen below $90 a barrel.

"Clearly the correlation between oil and commodity prices on the Canadian dollar is playing out. The more oil prices fall, the more dollar/CAD will rise," said Jeremy Stretch, head of currency strategy, CIBC World Markets, a Canadian bank.

"We could see dollar rise to C$1.1420 if U.S. data doesn't disappoint."

The Norwegian crown fell to its lowest in two months at 8.3359 crowns, hurt by the drop in crude oil prices. The dollar also rose to 6.6150 crowns, its highest since mid-2010.

Another currency struggling near lows was the British pound.

UK labour market data will be released on Wednesday and while the jobless rate could fall, if there is little evidence that more jobs are feeding through to higher earnings growth, rate hike expectations are likely to be pushed back.

Data on Tuesday showed British inflation slowed in September to its lowest level in five years, prompting markets to push out the likely timing of an interest rate hike by the Bank of England.

 Sterling fell to $1.5878, lows not seen since November 2013. It last stood at $1.5895, steady on the day.

Lack of inflation 

The lack of inflationary pressure across many developed economies, helped in part by a 26 percent slide in oil prices since June, has knocked government bond yields lower.

Much of the focus is on the decline in oil prices and whether this could lead to a global slowdown and prod the Bank of Japan and the European Central Bank to ease monetary policy further.

"It will exacerbate concerns over low inflation particularly where it is already well below central bank targets, which is most acute in Europe and in Japan keeping pressure on domestic central banks to ease monetary policy further," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.

The euro was down 0.1 percent at $1.2644, pulling away from a nearly one-week high of $1.2770 on Tuesday, after a closely watched ZEW survey showed German analyst and investor morale fell below zero.

The dollar also gained on the yen, with the greenback up 0.3 percent at 107.33 yen.

Japanese Economics Minister Akira Amari said in parliament on Wednesday that the government is not pursuing a policy to intentionally weaken the yen, and that it is necessary to monitor any negative impact from rising import prices.

Source: CNBC

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