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Dollar climbs as inflation builds case for higher rates

Economy Oct 29, 2021 02:55PM ET
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2/2 © Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration 2/2
 
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By David Henry

NEW YORK (Reuters) - The dollar index continued to rebound from prior-day losses on Friday after U.S. government bond yields rose on news that the Federal Reserve's preferred inflation measure showed prices continuing to rise faster than its 2% target.

The euro, which has a heavy weighting in the dollar index, plunged 1.05% against the greenback - the most since at least June.

The euro's drop helped drive the dollar index up 0.8% to 94.102 in the afternoon in New York (1820 GMT).

The fall in the euro more than reversed its big gain the day before and came as traders tried to sort through inflation reports and central bank comments to divine the course of interest rates for different currencies.

The euro also fell against the British pound by 0.4% and the Swiss franc by 0.7%.

Volatility in the foreign exchange and interest rate markets has increased throughout the week around central bank actions and economic data. Next week could bring more of the same around policy meetings of the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia.

"A source of volatility could be this discrepancy between what the markets are saying and what the central banks are saying," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Another reason for the volatility, Chandler and others said, was month-end portfolio repositioning on the day of the week when markets tend to be the least liquid.

"It is the end of the month and it is Friday," said Axel Merk, chief investment officer at Merk Investments in Palo Alto. Some of the trades were likely "window-dressing" so that month-end portfolios would not show so much leverage, he said.

U.S. Treasury yields rose after the government's index of core personal consumption expenditures - the Fed's preferred inflation measure - climbed at a 4.4% annual rate in September, continuing a run of inflation at levels not seen in 30 years.

U.S. interest rate markets have been unusually volatile as traders prepare for the Federal Reserve to raise rates around mid-2022.

European data on Friday showed inflation in the 19 countries sharing the euro rose to 4.1% in October from 3.4% a month earlier, beating a consensus forecast of 3.7% and creating a policy dilemma for the European Central Bank.

Germany's 10-year bond yield rose on Friday as much as 8 basis points to its highest level since May 2019 and Southern European government bond yields surged.

ECB President Christine Lagarde's failure during a Thursday press conference to push back against market expectations of higher interest rates has brought out bears, with Danske Bank strategists expecting the euro to fall to $1.10 over the next 12 months.

"Investors are just not buying what the ECB is saying," said Marios Hadjikyriacos, a senior investment analyst at brokerage XM. Markets are betting that inflation will force the ECB to pull back on asset purchases sooner than planned.

Elsewhere, the British pound fell 0.7% to $1.3698.

The dollar gained 0.3% against the Japanese yen to 113.92505.

The Australian dollar slipped 0.3% to $0.7521.

In cryptocurrencies, ether rose to a record $4,460 and was up 3% on the day, while bigger rival bitcoin gained 3% to $62,330.

Dollar climbs as inflation builds case for higher rates
 

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Comments (7)
Iyarin Boonnum
Iyarin Boonnum Oct 29, 2021 11:08PM ET
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Concern rate hike but lower bond yield.Dont lie to me!!!
Iyarin Boonnum
Iyarin Boonnum Oct 29, 2021 10:50PM ET
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So stupid logic. Dollar should go down to almost 0. GOLD SHOULD BE SHINE!! HUGE PUMP UP FREE DOLLAR TO MARKET ITS VALUE IS LESS THAN TOILETTE PAPER.
Evan Ault
Evan Ault Oct 29, 2021 7:03PM ET
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Dollar slaves think Fed taper will make a difference... #1 they can't. #2 they won't. #3 even if they did, it's a battle they dont have the tools to win. You think low interest rates are the cause of inflation? QE? There has been one form or another of Quantative easing for the last three decades, it's not going anywhere. Only thing raising interest rates will do is stunt growth even more than it is already stunted. only way to improve growth is kick progressive/socialist politicians and their policy prescriptions to the curb.
James Hilliard
James Hilliard Oct 29, 2021 7:03PM ET
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Troops, oinkers, and teachers LOVE socialist/ crony communist taxes. they shouldn't be allowed to vote. they have an obvious conflict of interest.
Marvin McEwen
Marvin McEwen Oct 29, 2021 3:38PM ET
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The USD has lost 85% of its buying power since 1971, and 50% of its buying power just since 1991...yes, I am sure they are really going to do something about it while there is a $30 trillion national debt and they are actively trying to push $3.5 trillion of additional pork spending and socialist/communist platforms.
Ac Tektrader
Ac Tektrader Oct 29, 2021 3:38PM ET
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then there's the the 7 trillion in Military spending which has limited long term impact on national income and wealth creation. in other wards its like running money down a rat hole. investing in the American people, historically, always works at creating and increasing more weath and prosperity.
Adebayo Peter
Adebayo Peter Oct 29, 2021 11:00AM ET
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Does anyone knows why the EURs are deeply FALLING.
Sherman Shields
Sherman Shields Oct 29, 2021 11:00AM ET
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Reserve bank and inflation
Sherman Shields
Sherman Shields Oct 29, 2021 11:00AM ET
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Christine Lagard
Ac Tektrader
Ac Tektrader Oct 29, 2021 11:00AM ET
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more sellers than buyers....
Rodney Dangerfield
Rodney Dangerfield Oct 29, 2021 10:51AM ET
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The USD has lost 98% of its value since 1971
William Bailey
William Bailey Oct 29, 2021 3:23AM ET
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No sustaining the free cash …. Catasrtofic crash in days to weeks
 
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