Currencies: Dollar claws back gains as euro weakens on Draghi concern for subdued inflation

The U.S. dollar retraced some losses achieved after Wednesday data, but remained in a close trading range. The euro a notable decliner after European Central Bank President Mario Draghi expressed concern with subdued inflation in the eurozone.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.06%  was up 0.1% to 89.742, slicing into Tuesday’s pullback of 0.3%, according to FactSet data. Tuesday’s loss was the index’s third in a row.

The WSJ U.S. Dollar Index BUXX, -0.06% which is a measure of the buck against a broader basket of rivals, was down 0.1% at 83.51.

The euro EURUSD, -0.1695% traded at $1.2370, down from $1.2392 in the previous session. The British pound GBPUSD, -0.0143% edged down to $1.3952 from $1.3962 on Tuesday.

The greenback moved lower against Japan’s yen USDJPY, -0.35% buying ¥106.20 compared with ¥106.58 late Tuesday in New York.

Against the Canadian dollar USDCAD, -0.1928% the buck slipped following Tuesday’s rally that was inspired by dovish comments from Bank of Canada Gov. Stephen Poloz. One U.S. dollar last bought C$1.2936, compared with C$1.2966 late Tuesday.

Elsewhere, the Australian dollar AUDUSD, +0.1781%  got a boost from upbeat economic data out of China, which is one of its major trade partners. The Aussie dollar last bought $0.7880, up from $0.7860 late Tuesday in New York.

What is driving the market?

The U.S. dollar dipped into negative territory after economic data showed that retail sales contracted for a third straight month in February, but retraced their losses promptly and returned to modest gains. An inflation report was largely in line with expectations.

On the trade front, Reuters reported late Tuesday that another $60 billion in tariffs could be imposed on Chinese goods, following steel and aluminum tariffs introduced last week. In Germany, Chancellor Angela Merkel, during her fourth inauguration as the country’s leader, said she wasn’t sure whether Europe could negotiate an exemption from last week’s metals tariffs.

Read: Twin deficit is not the whole story behind dollar weakness, according to Pimco

Investors also are closely watching personnel changes in the White House, with the announcement on Tuesday that Secretary of State Rex Tillerson would be replaced by Central Intelligence Agency Director Mike Pompeo. That change came just a week after Gary Cohn, the president’s chief economic adviser, announced his resignation. The moves have elevated concerns of turmoil in the White House that make implementing market-friendly policies a challenge.

The euro spent much of the early Wednesday trading in the red, after ECB head Draghi said at conference in Germany that he and his colleagues needed to see “a sustained adjustment in the path of inflation” toward its target of near but just below 2% before the bank stops its asset-purchase program.

The “performance of underlying inflation remains subdued compared with previous recoveries,” he told the conference attendees. “The key issues we need to examine are wage dynamics, their pass-through to prices, and the possible risks to the inflation outlook,” Draghi said.

The ECB last week dropped a longstanding pledge to boost the size of its 30 billion euro a month asset-buying program if the outlook for the eurozone deteriorated. His comments Wednesday on soft underlying inflation also suggested the ECB isn’t likely to raise interest rates in the foreseeable future.

Plus: Inflation is rattling markets—here’s what you should know about consumer prices

What are strategists saying?

“Washington is once again the epicenter of turmoil, sending the market into shivers after the ousting of Secretary of State Tillerson,” said Viash Sreemuntoo, corporate trader at HiFX, adding that the dollar index managed to recover on Wednesday.

“Although Mr. Draghi noted that inflation was on the right track, uncertainties still remained,” said Boris Schlossberg, managing director of FX strategy, in an note. “And while ECB officials are not considering any overt intervention measures, the form of soft jawboning is clearly an attempt to slow down the rise of the euro and keep it below the $1.2500 mark,” he said.

“By all measures, the euro should be lower as interest rate differentials between U.S. and Europe continue to expand, but chaotic White House policy, muted inflation data and so far sub-par growth in 2018 has cast doubt on the ability of the Fed to follow through with its hawkish talk,” Schlossberg added.

What are the data showing?

Retail sales continued to contract in February, hitting their third subsequent month of decline and falling 0.1% versus MarketWatch consensus estimate of a 0.4% gain. Excluding cars, retail sales grew by 0.2%, also underperforming a 0.4% expectation.

The producer-price index measuring wholesale inflation for the same month rose to 0.2%, beating forecasts of 0.1%.

January business inventories grew 0.6%, in line with previous data.

See: MarketWatch’s Economic Calendar

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