April 22 (Bloomberg) -- The euro surpassed $1.60 for the first time after European Central Bank officials said they'll act to restrain consumer prices if inflation doesn't slow.
The dollar weakened for a second straight day as oil surged past $119 a barrel and Federal Reserve Bank of Dallas President Richard Fisher said inflation is starting to grip U.S. consumers. South Africa's rand appreciated against all of the major currencies on speculation accelerating inflation will force the central bank to raise its target lending rate.
``There's rethinking of the ECB policy going forward,'' said Jay Bryson, global economist at Wachovia Corp in Charlotte, North Carolina, and a former Fed economist. ``All of the ECB officials are very hawkish. They either say the rate is appropriate or even have a bias to starting to raise rates.''
The euro advanced 0.5 percent to $1.5996 at 12:28 p.m. in New York, from $1.5912 yesterday. It touched $1.6019, the highest since Europe's currency debuted in 1999. The euro traded at 164.48 yen, from 164.32. The dollar dropped 0.5 percent to 102.80 yen, from 103.27 yesterday.
The 15-nation currency strengthened as ECB governing council member Christian Noyer said policy makers will act to restrain consumer prices if inflation doesn't slow.
``Our big problem is to make sure that inflation falls back below 2 percent next year,'' Noyer said today in an interview on RTL radio. ``We'll do what it takes for that,'' he said, adding, ``If needed, we'll move rates.''
Garganas on Inflation
His colleague, Nicholas Garganas, said at a press conference in Athens that inflation will ``remain high'' in the coming months and isn't expected to fall at a ``rapid pace'' in the second half.
The euro has surged 1.4 percent in April and 9.7 percent this year on speculation accelerating inflation will encourage the ECB to hold its target lending rate at a six-year high of 4 percent. A European Union report showed last week annual inflation rose to a 16-year high of 3.6 percent in March.
``ECB worries about inflation are over and above their concerns about the euro,'' said Nick Bennenbroek, head of currency research in New York at Wells Fargo & Co. `That's the most important driver of the euro.''
The euro may rise to $1.65 over the next week after breaching $1.60, said Greg Anderson, a foreign exchange strategist at ABN Amro Bank NV in Chicago in a note to clients today. Breaks of $1.30, $1.40 and $1.50 all led to increases of about 3 cents in about a week, Anderson said.
Three-Month Euribor
The implied yield of the three-month Euribor December future rose to 17 basis points to 4.63 percent from 4.47 percent yesterday. It has risen 0.65 percentage point this month.
A decline in European bonds after Noyer's comments widened the yield advantage of two-year German government bunds over Treasuries with similar maturities by 11 basis points, or 0.11 percentage point, to 173 basis points. The increased spread boosted the appeal of euro-denominated assets.
South Africa's rand rose 2.5 percent against the South Korean won and 1.9 percent versus the dollar on bets inflation will force the central bank to raise borrowing costs, increasing the currency's interest-rate advantage.
The Pretoria-based central bank raised its benchmark rate a fifth time in 10 months on April 10, lifting it a half- percentage point to a five-year high of 11.5 percent.
The dollar extended its drop against the euro after a U.S. industry report showed sales of previously owned homes fell in March. Purchases of previously owned homes dropped 2 percent to an annual rate of 4.93 million, from 5.03 million in February, the National Association of Realtors said today in Washington.
Fed Rate Cuts
The U.S. central bank has lowered the fed funds target by 3 percentage points since September to 2.25 percent to prevent the economy from tipping into a recession. The ECB has kept its benchmark unchanged at 4 percent since June.
Futures on the Chicago Board of Trade show the odds of the Fed cutting its target rate by a quarter-percentage point are 84 percent. The rest of the odds are for no reduction.
The Dallas Fed's Fisher said yesterday in a Fox Business Network interview airing today that inflation from rising food and energy prices has been so persistent that it's starting to affect consumers' expectations for future prices.
``It is beginning to affect our behavior,'' Fisher said yesterday in a Fox Business Network interview airing today. ``I'm concerned that we might be on a path of higher inflation than we would otherwise have had.''
Fisher voted against interest-rate cuts at the Jan. 30 and March 18 meetings, and was joined in dissent by Philadelphia Fed President Charles Plosser at the March meeting. The committee meets again on April 30.
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