Dollar soars to 16-month high after U.S. inflation surge

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LONDON (Businesshala) – The dollar hit a 16-month high on Thursday and the bond and stock markets tumbled after the strongest US inflation reading in three decades, raising hopes of a hike in Fed interest rates next year.

FILE PHOTO: A US dollar banknote is seen in front of the displayed stock graph in this example taken on May 7, 2021. Businesshala/Dado Ruvik/Illustration

The dollar index, which gauges the currency against six peers including the yen and the euro, continued to make steady progress in early European trade after rising on Wednesday in its biggest jump since March. [/FRX]

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US consumer price data released Wednesday showed the biggest gains in four months, pushing annual growth to 6.2%, the strongest year-on-year increase since November 1990 and a 5.4% jump in September.

The dollar pushed the euro below $1.15, causing it to drop to the next major chart support level at $1.12. European stocks edged higher on competitiveness, but the yen was falling to a four-year low of 114.15 per dollar.

“There wasn’t a single element of CPI data that surprised the upside yesterday, it was everywhere,” said Societe Generale FX strategist Kit Jax.

“You can’t ignore something that’s broad-based and that would reinforce the idea that the Fed is going to hike next year.”

Euro zone bonds were calm in early trade, following a sharp sell-off with the US Treasury following US inflation numbers. US bond markets remained closed on account of the holiday. [GVD/EUR]

Still, 10-year bond yields across Europe were nearly two basis points higher, firmly above last week’s lows as central banks, including the ECB, spoke of aggressive market pricing on rates.

On Wednesday, US Treasury yields rose to nearly 1.6%, the highest since February. US real yields, which take inflation into account, fell to a record low and five-year breakeven rates hit a record 3.113%.

“Inflation numbers surprised upwards, and they may not even peak,” said ING economist Rob Carnell.

“The market thinks the Fed, and most other central banks, are behind the curve,” he said, meaning policymakers have tightened communications more quickly than ever. “Risk Assets hates it.”

Stock markets in China and Japan also rose overnight, backed by property developer China Evergrande Group, to avoid a default and another last-minute bond coupon payment by the weaker yen, which helps Japanese exporters.

Chinese blue chips rose 1.28%, led by real estate stocks. Japan’s Nikkei ended up 0.6% higher as the yen weakened to 112.73 from 114.15 per dollar earlier this week.

inflation

US stock futures ticked up 0.1%. On Wednesday, the S&P 500D fell 0.8%, its worst day in a month.

The Fed has said prices will slide as supply constraints ease and urged patience last week, reiterating that high inflation is “expected to be temporary”.

The money market now makes the first Fed interest rate hike until July.

Volatility spread to other markets, with Wall Street’s so-called fear gauge CBOE volatility index touching its highest level in nearly a month.

Investors sought an inflation hedge, with gold trading down nearly $1,850 on Thursday before jumping to a five-month high of $1,868.20.

Core energy commodities are also driving up inflation. Oil in London held steady after retreating sharply from a nearly seven-year high last day, when US President Joe Biden said his administration was looking for ways to reduce energy costs.

Brent crude futures rose 64 cents to $83.27 a barrel, but tumbled on Wednesday from a three-year peak of $85.50 and October’s $86.70.

US West Texas Intermediate (WTI) crude rose 60 cents to $81.98 a barrel, but hit an overnight high of $84.97 and last month’s seven-year peak.

Bitcoin set a new all-time high of $69,000 and then dropped back to around $64,700.

Additional reporting by Kevin Buckland in Tokyo, Editing by Timothy Heritage

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