By Daniel Bases
NEW YORK (Reuters) – The dollar rose on Tuesday on unexpectedly better U.S. April housing data, compounding an earlier euro sell-off that was spurred by hints the European Central Bank could take more action to lower euro zone bond yields and boost inflation.
U.S. housing starts reached their highest level in 7-1/2 years in April, welcome news after dismal first-quarter data.
“It is good for the growth outlook. The question is whether or not people will buy the houses they are building and whether or not consumption will hold up in the U.S. That is going to be absolutely necessary for the Fed to see,” said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York.
Cochinos said more evidence of consumption would be necessary for the U.S. Federal Reserve to finally lift interest rates and to truly rebuild a strong dollar view.
“Until then, this is good news, certainly dollar-positive, but we are trying not to overemphasize that this is the beginning of the turn because we really need to see that consumption follow-through,” he said.
The euro hit a two-week low of $1.11185, down 1.74 percent after the U.S. data, according to the EBS trading platform. It leveled off around $1.11540, down 1.42 percent in late New York trade.
Earlier the euro weakened after ECB Executive Board member Benoit Coeure said the bank would buy more securities in May and June due to low market liquidity in July and August. He also said the recent European government bond market sell-off was a normal correction, though he added he was worried by how fast it had happened.
The comments, while carefully worded, came after a month of rises in German bond yields and the euro, which thwart the main ways in which the central bank’s 1 trillion euros of quantitative easing (QE) aims to help the economy.
Coeure’s fellow ECB governing council member Christian Noyer said the bank was ready to take further action to meet its inflation target.
“It’s the first indication from the ECB that they’re not happy with the unwinding of the whole QE dynamic in the market that involved lower bund yields, lower euro,” said Ian Gunner, portfolio manager of the Altana Hard Currency Fund in London.
Sterling fell to $1.5445, a one-week low, before rebounding to $1.5499 for a loss of 0.95 percent. Data showed British inflation fell into negative territory last month for the first time since 1960.
The dollar rose 0.62 percent to 120.72 yen, its best level since April 13.
(Additional reporting by Jemima Kelly in London; Editing by Paul Simao and Lisa Shumaker)