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Midweek, the dollar fell to its lowest value against the euro since Aug. 25, but Friday marks a second winning day for the greenback:



Dollar Strengthening/ Weakening
















Source: Bloomberg as of 3:25 p.m. EDT on Oct. 16, 2015. CAD = Canadian dollar. GBP = British pound.

The narrative for this rebound appears to be "policy divergence." The Federal Reserve may push back its first post-crisis interest rate hike to next year, but even if that is the case, the U.S. will remain well ahead of the European Central Bank with regard to the interest rate cycle. That difference in policy is driven by a divergence in economic performance -- and this week's inflation provides an illustration of the latter.

Yesterday, the Bureau of Labor Statistics released the latest Consumer Price Index for the U.S., and today it was Eurostat's turn to release inflation data for the euro area and the wider European Union.

Yesterday's figures showed that U.S. prices fell 0.2% in September, with core inflation (which excludes food and energy prices) amounting to a meager 0.1%.

Meanwhile, Eurostat reported a 0.1% drop in prices, while the index excluding energy and unprocessed food rose 0.8%.

Incidentally, focusing on headline numbers for a comparison can be misleading: Those two sets of numbers are not reported on a comparable basis, so it's easy to get tripped up. The BLS highlights month-on-month growth rates, while Eurostat favors year-on-year growth rates.

This is how inflation in the two currency areas compared on a like-for-like basis in September (yes, the United Sates is a currency area):


CPI, Year-on-Year Growth

CPI Ex-Food and Energy, Year-on-Year Growth

United States



Euro area



Source: Bureau of Labor Statistics, Eurostat.

Here's how core inflation has evolved in the U.S. and euro area on a year-to-year basis since October 2008 (the month after Lehman Brothers' bankruptcy filing):

The graph makes it clear that the U.S. is on sounder footing, with a core inflation rate that has not dipped below 1.5% for nearly four-and-a-half years. The equivalent rate for the euro area has exhibited a clear downward trend over the same period, dipping as low as 0.6% this January.

If we look at the same graph overlaid with the EUR-USD rate (red line), the euro has lost 15% relative to the dollar over the entire period: