By Rachel Koning, CBS.MarketWatch.com
Aug. 17, 2004

CHICAGO (CBS.MW) - The U.S. currency recovered from near a one-month low against the euro Tuesday, as a negative dollar reaction to tame U.S. inflation data was short-lived.

Modest selling pressure returned for the euro, which fell during European trading hours after a measure of German investor sentiment slumped to a 13-month low. But its trading was also affected by the ripple effect from other European currencies.

The euro was quoted at $1.233 in late-morning U.S. trading, a drop of 0.2 percent from late U.S. trading levels on Monday. See the CBS MarketWatch currencies page.

The currency market was expected to continue its choppy trading patterns of late, said Meg Browne, a currency analyst with HSBC. "It's a culmination of factors producing cross-currents in the market" from oil prices to U.S. inflation data to U.K. housing statistics to German sentiment.

Browne said the biggest currency mover was the dollar versus the Swiss franc. Traders appeared to be dumping their protective positions in the so-called safe-haven Swiss currency as the Athens Olympics have so far proceeded without a terrorism scare. Commitment of Traders data tracked by the U.S. Commodity Futures Trading Commission had shown a heavy concentration in the franc.

The dollar was up 0.3 percent at 1.2446 Swiss francs in morning U.S. trading.

The British pound was down 0.4 percent at $1.8319, as a weaker-than-expected RICs survey tracking housing prices was seen cutting the odds for aggressive U.K. interest-rate increases. See London Markets.

Consumer prices in check

The euro briefly grazed $1.2389, nearly its richest dollar level in a month, immediately following a report that showed U.S. consumer prices fell for the first time since November 2003. The closely watched core rate of inflation, excluding the volatile food and energy categories, edged up 0.1 percent. See Economic Report.

Tame inflation might encourage the interest rate-setting Federal Reserve to limit what financial markets widely expect will be a string of modest rate rises over coming months. Higher rates would make U.S. investments more appealing to foreigners, boosting demand for greenbacks to buy those investments.

U.S. economic data have been hit or miss since a weak July employment report was released earlier this month. Concern that a spotty economy won't allow the United States to draw enough foreign capital to continue to finance its record trade and federal budget deficits has remained an underlying drag on the U.S. currency.

Still, short-term interest-rate futures contracts show hedgers are unwavering in their prediction for higher U.S. rates this year. The question remains, say analysts: Will the pace of Fed hikes be enough lure overseas investment even as rates remain much higher in other areas, the United Kingdom and Australia, for instance?

Government data issued Monday did show that foreign appetite for U.S. debt and assets remained strong in June, sending the dollar broadly higher.

Oil's far-reaching impact

The greenback remained lower against the yen Tuesday. The Japanese currency was helped by a decline in crude oil prices from recent record peaks.

The greenback was quoted at 110.19 yen, a drop of 0.2 percent on the day. The euro was valued at 135.7 yen, a decline of 0.5 percent.

Japan imports all its oil, while its export-driven economy is particularly sensitive to the risk that expensive energy poses in cutting global spending on Japanese-made goods. The yen also recovered from a three-month low against the euro.

"The oil price declined and stocks recovered, and people thought this combination would be positive for the yen, which is one reason the dollar fell," said Toru Umemoto, financial markets analyst at Keio University's Global Security Research Center in Tokyo. See Asia Markets.

Crude futures fell in early New York trade amid continued relief that the threat to Venezuelan oil production has abated following President Hugo Chavez's weekend political victory. Crude futures were drifting near $46 a barrel, off a record near $47 hit in recent days. See Futures Movers.

Oil price worries apparently weighed on sentiment in Germany.

The ZEW Indicator of Economic Sentiment in the eurozone's largest economy declined in August by a greater-than-expected 3.1 points. The index stood at 45.3 points, compared with 48.4 points in July.

"The opinions of financial analysts coincide with the fear that Germany's economic recovery could slow down due to an increasing uncertainty about both the economic development worldwide and the evolution of the oil price," the ZEW Institute said.

The uncertainty surrounding the government's ability to see through labor force reforms also likely contributed to concern about German growth, Ulrich Schroeder, head of ZEW's International Finance Dept. said in a televised interview. Tens of thousands of Germans have joined recent protests in eastern Germany over the government's plans to cut jobless benefits. See European Markets.

"A 13-month low highlights the fact that the global economy is facing increased headwinds and that the resurgent euro continues to lack solid fundamental grounding," said Alex Beuzelin, senior market analyst with Ruesch International in Washington.

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