Dollar climbs as inflation builds case for higher rates
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).
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.
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.
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.
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