US Dollar Drops, Headed for For Biggest Yearly decline in Decade

The U.S. dollar fell Friday, heading for its largest yearly drop in a decade.

The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, fell 0.4%, losing ground against the euro. The dollar has fallen roughly 7% this year, on pace for its biggest annual decline since 2007.

The euro was supported by preliminary German inflation data for December which showed that consumer prices rose 1.6% from last year, when harmonized for European Union data, Germany’s Federal Statistical Office said Friday. Prices also rose 0.6% from the previous month.

The euro climbed 0.6% against the U.S. currency, rising above the $1.20 level to $1.2008, and is up around 14% in 2017

Investors have favored the euro versus the dollar throughout much of 2017, as faster-than-expected growth in Europe prompted investors to speculate that officials can tighten monetary policy sooner and faster than had previously been expected. Higher interest rates tend to make a currency more attractive to yield-seeking investors.

The European Central Bank is reducing its monthly bond purchases to €30 billion in January from €60 billion. The ECB had earlier scaled back its purchases from €80 billion in April.

Despite the Federal Reserve’s interest-rate increases, many investors have shied away from the dollar, thinking that impact of rate increases on the currency diminish “the farther along the Fed gets in the tightening cycle,” said Erik Nelson, a currency strategist at Wells Fargo Securities. “A lot of rebalancing needs to go on for a lot of portfolio managers.”