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Dollar rises to 6-month high vs. euro

The greenback gains against foreign currencies, even as inflation rises to its highest level in 17 years.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The dollar continued to rally against the euro Thursday - soaring to a 6-month high - and against other currencies, as investors offered a mixed reaction to soaring U.S. inflation.

The 15-nation euro slid to $1.4803 Thursday evening, from $1.4918 late Wednesday. The euro briefly fell below $1.48 for the first time since February.

The pound lost more ground against the dollar Thursday, after a sizeable 1.5% decline the previous day. The British currency fell to $1.8685 from $1.8704 on Tuesday.

The dollar also gained against the Japanese yen, rising to ¥109.7765 from ¥109.529 late Wednesday.

The U.S. currency managed to rise from the previous day's levels even as the U.S. Labor Department reported Thursday that the annual inflation rate surged to 5.6% in July - inflation's highest level in 17 years.

The so-called core Consumer Price Index, which excludes the volatile food and energy prices, increased to 2.5% annually. That means inflation is growing above the Federal Reserve's perceived "comfort zone" of 1% to 2% annually.

"On one side, people think higher inflation should mean higher interest rates, which would mean a higher domestic currency," said Dustin Reid, a senior currency strategist at ABN AMRO.

"But others think the central banks, whose hands are handcuffed by rising inflation rates and deteriorating domestic economic conditions, may see their domestic currencies underperform over time," he added.

The dollar has soared against foreign currencies in the past month as the European economic outlook has worsened.

Last week, the European Central Bank decided to hold a key interest rate steady to support economic growth, instead of raising it to combat inflation. Rate hikes usually translate into lower inflation and increased currency value, while cuts tend to have the opposite effect.

Wednesday, the United Kingdom said unemployment is on the rise and inflation will continue to soar to 5%. As a result, the government hinted that interest rates may have to be lowered to prevent the country from entering a recession.

The euro fell below $1.50 on Friday for the first time since February, and has fallen more than 12 cents from its high of $1.6038 set on July 15. The British currency fell on Wednesday to its lowest point against the dollar since October 2006. To top of page

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