US dollar rises as inflation data revives bets of tighter monetary policy

The dollar touched its strongest point against the euro in 16-months on Thursday, after a surge in US consumer price inflation to a three-decade high revived market bets on the Federal Reserve tightening monetary policy.

After a steep fall overnight, the eurozone currency dropped a further 0.1 per cent to $1.146, its weakest since July 2020.

Sterling also touched its lowest point against the dollar since December 2020, despite official data showing the UK economy grew by a better than expected 0.6 per cent in September from the previous month.

US consumer prices rose 6.2 per cent in the 12 months to October, figures showed on Wednesday, exceeding economists’ expectations and sparking the biggest sell-off in short-term US government debt since the global market turbulence of March 2020. The Treasury market was closed on Thursday for a national holiday.

“Market expectations of the first US rate rise [from current record lows] have moved from 2023 into the middle of next year, on the basis that inflation stays elevated ,” said Mobeen Tahir, research director at ETF provider WisdomTree.

Federal Reserve chair Jay Powell pledged “patience” towards raising interest rates at the conclusion of the US central bank’s monetary policy meeting last week. The Fed also maintained its view that high inflation was “transitory”, and driven by supply and demand imbalances and the reopening of the economy from 2020’s shutdowns.

The CPI data was “as bad as it looks”, Standard Chartered strategist Steve Englander said. in a note to clients. Standard Chartered’s own measure of “core” US inflation, which excludes food and energy as well as price moves in pandemic-sensitive items such as used cars, hotels and airfares, rose 0.45 per cent from September to October.

Meanwhile, European Central Bank president Christine Lagarde said late last month that current high rates of eurozone inflation would fall below its 2 per cent target by 2023.

“The ECB is generally seen as staying dovish for longer,” said Tatjana Greil Castro, head of public markets at credit investor Muzinich & Co.

ECB board member Isabel Schnabel also signalled in a speech earlier this week that the eurozone central bank might keep its main deposit rate below zero until after it ends its crisis-fighting bond-buying programme.

Wall Street equities looked set to trade around record highs, having rallied in recent weeks as strong corporate earnings suggested companies had managed to pass higher costs on to consumers.

Futures contracts tracking the US S&P 500 share index gained 0.4 per cent as investors judged stocks to be less affected by inflationary concerns than fixed income-paying government debt securities. Contracts on the Nasdaq 100 rose 0.8 per cent after the technology-heavy index fell 1.4 per cent on Wednesday.

According to research house DataTrek, during the high inflation period of 1972 to 1980, S&P companies’ profits grew 120 per cent, outpacing an aggregate 110 per cent rise in consumer prices over the same period.

The regional Stoxx Europe 600 share index rose 0.3 per cent, while London’s FTSE 100 gained 0.4 per cent as exporters were boosted by the weak pound.

In Asia, Hong Kong’s Hang Seng index closed up 1 per cent and mainland China’s CSI 300 rose 1.6 per cent, boosted by media reports suggesting the Beijing government was preparing support for the nation’s ailing real estate sector.

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