LDN - Business

Dollar rockets to 16-month highs after hot U.S. inflation; euro sinks

[November 11, 2021] By Tommy Wilkes

LONDON (Reuters) - The dollar rose to 16-month highs against the euro and other currencies on Thursday, and the yen fell back towards multi-year lows, after the hottest U.S. inflation reading in a generation encouraged bets on interest rate hikes.

U.S. consumer prices grew last month at their fastest annual pace since 1990, data showed, and traders think the Federal Reserve could respond by lifting interest rates faster than in Europe or Japan.

The euro dropped as the European Central Bank is seen lagging on policy tightening. It slipped to $1.1454 on Thursday, its lowest since July 2020.

"With relative COVID trends still moving against Europe and a broader more negative EM/China backdrop it is hard to see this relative growth under-performance reverse any time soon," said George Saravelos, a strategist at Deutsche Bank, adding the euro could weaken as far as $1.12.

Sterling was also down at a new 11-month low of $1.3365. Data showing Britain's economy lagging rivals in the July-September period did little to help.

The yen extended a sharp reversal of recent gains to fall to 114.15 per dollar - close to the Japanese currency's four-year low of 114.69 reached last month. The Australian and New Zealand dollars recorded one-month troughs.

Against a basket of currencies, the dollar rose to as high as 95.101, its strongest since July 2020.

"The hawkish repricing of Fed policy expectations has reinforced the U.S. dollar's upward momentum from the previous week in which it had already benefitted from the other G10 central banks pushing back against rate hike expectations outside of the U.S," said Lee Hardman, currencies analyst at MUFG.

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A packet of U.S. five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron//File Photo/File Photo

U.S. government bond yields have risen sharply, including the 30-year Treasury yield passing 1.5%.

After the surge in Treasury yields, which rise when bond prices fall, the difference between five-year U.S. yields and yields at the same tenor in Japan and Germany is wider - in favour of Treasuries - than at any time since early 2020. [US/]

Emerging market (EM) currencies have also suffered from the dollar's broad rise, with MSCI's EM currencies index suffering its sharpest drop in two months.

The Australian and New Zealand dollars slipped, pulled lower by the jump in the U.S. dollar. The Aussie fell half a percent to a one-month low of $0.7287 and the Kiwi dropped 0.6% to $0.7013. [AUD/]

Elsewhere, Turkey's lira tumbled to a new record low of 9.97 to the dollar after the U.S. inflation reading and as expectations grow Turkey will cut rates again soon.

(Editing by Timothy Heritage and Mark Potter)

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