Weak US data boosts euro and raises hope of rate cut

The Euro hit a three-month high against the dollar yesterday after data showing a fall in US producer prices increased the likelihood of a cut to US interest rates later this month.

The US labour department's producer price index fell by 0.9 per cent last month, against a 0.4 per cent fall in June and forecasts of a 0.3 per cent decline. It was the biggest decrease in producer prices since August 1998, when they fell 1 per cent.

The dollar fell as far as $0.8955 against the euro, its weakest level since early May. Economists said US rates were likely to be cut by 0.25 percentage points to 3.5 per cent when the US Federal Reserve meets on 21 August. The Fed has already cut rates six times this year.

Petrol prices suffered an 18 per cent decline, their sharpest fall in eight years. That was compounded by declining prices for component parts such as computer chips. However, the "core" producer price index, which exclude energy and food, was up 0.2 per cent, having risen 0.1 per cent in June.

Carol Stone, deputy chief economist at Nomura Securities in New York, said: "The whole report is quite favourable from an inflation point of view. This gives the Federal Reserve room to cut rates however it sees fit this month."

The dollar's decline began on Wednesday following a gloomy assessment of the US economy in the Federal Reserve's key "Beige Book", which reinforced fears of a sharp slowdown in economic growth.