Dollar drops to one-week low as inflation fears fade; ECB in focus

LONDON: The dollar index fell to its lowest in a week on Thursday and there was a mild "risk on" tone in currency markets, after US CPI data calmed inflation fears, while attention turned to the European Central Bank's policy meeting.

Softer consumer prices data in the United States on Wednesday helped to ease concerns about a possible spike in inflation when economies re-open from the COVID-19 pandemic.

That helped lift world shares to their highest in over a week, with the Dow Jones Industrial average marking a record close, while US Treasury yields eased from their recent spike.

"The market had probably got itself a little bit too over-sensitive about rising runaway inflation - which there isn't yet," said Kit Juckes, head of FX strategy at Societe Generale.

The soft inflation data "gives us respite from risk aversion and reverses some of the recent currency moves," he added. At the European Central Bank meeting, policymakers are expected to send a message that they will prevent bond yields from rising further and harming the bloc's economic outlook - although SocGen's Juckes said that, since the rise in yields is led by Treasuries, it is unlikely to be influenced by the ECB.

The bank is expected to signal faster money printing but stop short of adding to its already aggressive policy package.

The ECB's policy decision will be at 1245 GMT, followed by a news conference at 1330 GMT.

Analysts at ING wrote in a note to clients that they do not expect the euro to be the focus of discussion, since it has fallen since the previous meeting. The euro-dollar pair is being more driven by dollar-related factors such as Treasury yields, ING said.

At 1215 GMT, the dollar was down around 0.3% at 91.581 against a basket of currencies, its third consecutive day of losses after retreating from a three month high of 92.506 on Tuesday.

The euro was around 0.3% higher against the dollar, at $1.19605. It has fallen 2.1% so far this year.

"If the central bankers signal that they would not only be willing to exhaust their current asset purchasing programme but to even extend it in reaction to a further rise in yields, this might put a dampener on possible rate expectations thus putting pressure on the euro," wrote Commerzbank strategist Thu Lan Nguyen in a note to clients.

"However, I would not expect a significant impact as the market is only expecting rate hikes in the euro zone to occur in the very distant future compared with the US anyway," she said.

Elsewhere, the Australian and New Zealand dollars were up for the third session in a row, both at their highest in a week versus the US dollar, helped by rising commodity prices .

The Norwegian crown touched its strongest in just over one year against the euro, before easing to 10.082.

Focus later in the day will be on an auction of 30-year US Treasuries. An auction of 10-year notes on Wednesday drew sufficient demand, helping to allay concerns about investors' ability to absorb an increase in debt needed to finance the response to the pandemic.

The Japanese yen was down around 0.2% versus the dollar at 108.55.

Also aiding the improved risk appetite was US President Joe Biden's $1.9 trillion COVID-19 relief bill winning final approval in the House of Representatives on Wednesday.

Elsewhere, bitcoin steadied at $56,086.94. The cryptocurrency has recovered some recent losses but not surpassed its all-time high of $58,354.14 which was reached on Feb. 21.