By - Reuters
By Alun John and Tom Westbrook
LONDON/SINGAPORE (Reuters) - The euro was heading for its best week since mid-January on Friday after inflation data left markets positioned for more rate rises in the euro zone than in the United States, while the dollar index was set for a second consecutive quarterly loss.
The European common currency was at $1.08735, down 0.28% on the day but heading for a 1% weekly gain, its most in 11 weeks, as well as monthly and quarterly increases.
While euro zone inflation dropped by the most on record in March, according to data on Friday, core price pressures, which exclude food and energy, accelerated, maintaining pressure on the European Central Bank (ECB) to keep raising rates.
German inflation data released on Thursday had also pushed the euro up by 0.56%.
"We still expect further rate hikes. The ECB made clear it would raise rates further should its baseline scenario for core inflation materialise and so long as financial market concerns regarding adverse banking sector developments subside," said analysts at Nomura.
"We believe core inflation will come in above the ECB's March 2023 projections, and this therefore underscores further rate hikes," they said.
Attention now turns to U.S. data, with the core personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation measure, due out later on Friday.
A BUSY QUARTER
In terms of the bigger picture, the dollar index is down 1.2% for the quarter, extending a 7.7% fall in the fourth quarter of 2022, as a modest boost it received from a rush to safety in mid-March due to European banking jitters faded.
The dollar has also been dragged back as the focus on the U.S. banking sector in March caused U.S. interest rate markets to dramatically reprice the outlook.
Markets now see a roughly 40% chance that the Federal Reserve is finished with rate increases. Fed funds futures have priced rate cuts by year's end. <FED WATCH>
The index was up 0.2% on the day at 102.37
Sterling is set to be the best performing currency in the first quarter of 2023 with a roughly 2.5% gain. It was flat on the day on Friday at $1.2386, but still set for weekly and monthly increases.
"Along with the improvement in the economic outlook, sterling is definitely drawing benefits from the market’s conviction that the Bank of England will need to continue raising rates," said Francsco Pesole, FX strategist at ING.
The dollar drifted 0.36% higher against the yen to 133.17 yen, set for a weekly gain after four weeks of declines as the Japanese currency benefited from its safe haven status, as well as lower U.S. yields.
Another popular safe haven, the Swiss franc, has had a wild month, as it rose in the wake of Silicon Valley Bank's collapse, then dived as the bank jitters hit Switzerland.
It was last at 0.914 per dollar, and looks set to end the month not far from early February's 18-month peak of 0.9061.
Next week, central bank meetings loom in Australia and New Zealand, and markets have priced in a pause for Australia and a step-down in pace to a 25 basis point increase for New Zealand.
On Friday the New Zealand dollar was at $0.6257, and the Aussie at $0.6690. It is about 1.8% lower for the quarter. [AUD/]
Both currencies found support from expanding Chinese manufacturing activity, though data on Friday showed the pace was slowing down. China's yuan inched higher.
Currency bid prices at 1137 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
$1.0876 $1.0905 -0.26% +1.50% +1.0925 +1.0865
133.1700 132.4450 +0.54% +1.47% +133.5750 +132.6800
144.84 144.70 +0.10% +3.24% +145.6600 +144.5800
0.9172 0.9132 +0.46% -0.78% +0.9177 +0.9125
1.2383 1.2387 -0.01% +2.41% +1.2423 +1.2356
1.3552 1.3522 +0.24% +0.04% +1.3564 +1.3509
0.6690 0.6713 -0.34% -1.86% +0.6738 +0.6672
Dollar/Dollar 0.6260 0.6262 -0.04% -1.42% +0.6297 +0.6249
Tokyo Forex market info from BOJ
(Reporting by Tom Westbrook in Singapore and Alun John in London, additional reporting by Kevin Buckland in Tokyo; Editing by Robert Birsel and Gareth Jones)