By John McCrank
NEW YORK (Reuters) - The dollar edged back from a 16-month high on Thursday as traders assessed whether the U.S. currency's recent surge, fueled by diverging central bank tightening expectations amid surging inflation around the globe, had gone too far.
The dollar index, which measures the currency against a basket of six rivals, reached its highest since mid-July 2020 on Wednesday at 96.226, but was last down 0.272% at 95.553.
"We've had a really big move in the dollar in the past couple of weeks, and I think that we're taking a breather now," said Erik Nelson, a currency strategist at Wells Fargo (NYSE:WFC) Securities.
Recent U.S. data showed inflation in October running at its hottest since 1990, while retail sales numbers topped forecasts, leading the market to price in earlier rate hikes by the Federal Reserve than had been anticipated, driving strength in the greenback.
"The dollar has had a full rally and now the market is going to step back and assess if indeed the inflation theme continues at the pace that everybody thinks it will," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
"If that's true, then there's nothing stopping it, but I think if the numbers start to print a little cooler as we go forward, you'll definitely see a bit of a dollar pullback across the board."
The euro rose 0.45% to $1.13695, bouncing off of a 16-month low hit on Wednesday below $1.13.
Sterling edged up 0.1% versus the greenback to $1.3494, having jumped 0.5% on Wednesday after data showing rising inflation in Britain last month piled pressure on the Bank of England to hike interest rates at its meeting next month.
The New Zealand dollar rose 0.55% to $0.7036 after a central bank survey showed near-term inflation is expected to rise.
Elsewhere, Turkey's lira shed another 2.83% after its central bank cut rates by 100 basis points to 15%, even in the face of inflation near 20%, sending the Turkish currency hurtling southwards.
"The lira remains a punching bag, and further weakness has no end in sight," said Edward Moya, senior market analyst at Oanda.
The lira has lost around 11.5% of its value this month amid President Tayyip Erdogan's renewed criticism of interest rates and calls for stimulus despite the risks. It was last at 10.909, having earlier hit a record low of 11.30 per dollar.
Commodity-linked currencies rebounded along with oil prices, which had earlier slid to six-week lows. [O/R]
The Canadian dollar edged off a six-week low, rising 0.08% to C$1.26, or 97.37 U.S. cents. Markets are expecting the Bank of Canada to start raising rates early next year.
The Australian dollar also moved off of a six-week low of $0.7251 and was last up 0.16% at $0.72765.
Graphic: World FX rates https://graphics.reuters.com/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html