The dollar fell against the euro on Tuesday as U.S. housing starts plunged to their lowest level in more than 17 years in May, casting more doubt over an anticipated early Federal Reserve interest rate increase, however, losses were limited, with traders also paring expectations of tighter monetary policy in the euro zone after ECB Executive Board member Lorenzo Bini Smaghi said a quarter-point hike should bring inflation below its target.
Housing starts set an annual pace of 975,000 units in May, from a revised 1.008 million the previous month, the lowest since March 1991 and other reports showed U.S. industrial production slipped unexpectedly in May together with a surprise widening in the first-quarter current account deficit.
The euro rose earlier to 1.5552 and in late afternoon trading in U.S session, it was last at 1.5512, up 0.3 percent on the day. The yen traded at 167.49 per euro, unchanged. It earlier touched 167.84, the weakest level since July 23. Dollar weakened against the yen and fell from 108.40 to 107.94 yen. Short-term interest rate futures, which track market expectations for Fed policy, showed around a 55 percent of a quarter-point interest rate increase in August, down from 90 percent late on Monday, however, analysts remain convinced that the Fed will raise interest rates by year-end, citing an unexpected 1.4 percent rise in the headline producer price index in May, which pointed to growing inflation pressures already highlighted by the central bank.
Early in the day, U.K. annual Consumer Price Index rate jumped to 3.3 percent in May from 3 percent, the highest since the Bank of England was granted independence in 1997, prompting a letter to the Treasury from BoE chief Mervyn King explaining the rise but King struck a rather more dovish tone than many had expected, arguing that aggressive action to cool price pressures over a 12-month horizon would spur market volatility and inflation could even undershoot its target over two years.
This caused British Pound to fall broadly. Sterling retreated to as low as 1.9470 and 0.7955 against the dollar and euro respectively before recovering early losses in afternoon U.S. session.
The Band of Japan will announce their meeting minutes at 2350GMT on Wednesday, and economic data releases include Australia leading economic index (April), Bank of England minutes and CBI industrial trend (April), Switzerland’s Zew index (May) and Canada leading indicators (May) with major U.S. economic data is released