U.S. inflation drives dollar to 2021 peaks

On Thursday, the dollar rose to its highest level of the year against the sterling and the euro. The yen fell to its lowest level in a month following the highest inflation reading in a generation, fueling bets on rate hikes.

After headline US CPI came in at 6.2 percent overnight, the euro was hammered down 1% and through significant support to $1.1476, its lowest since July 2020. It was pinned at that level early in the Asian session and did not have any chart support until around 1.12. The dollar’s broad rise harmed emerging market currencies as well, with MSCI’s E.M. currencies index falling sharply for the first time in two months as U.S. Treasury yields rose.

The rate movements, particularly at the short end, suggesting traders believe the Federal Reserve will intervene to raise interest rates if prices continue to rise, according to National Australia Bank’s head of F.X. strategy, Ray Attrill. Price rises affected rents, put pressure on wages, and lengthened and broadened the pandemic’s inflationary pulse. The spread between five-year U.S. yields and yields at the same maturity in Japan and Germany is at its widest in favor of Treasuries since early 2020.

The Australian and New Zealand dollars fell against the dollar’s broad rise on Wednesday. Still, they found support near one-month lows as investors expect the Antipodes’ interest rates to rise to counter inflation.

Currencies

In Asia, the Australian dollar held steady at $0.7331, while the New Zealand dollar held steady at $0.7065.

The survey period only partially covers the lifting of pandemic-imposed restrictions in major cities. Hence, analysts say it will be difficult to interpret.

Euro/Dollar -$1.1482 $1.1477 +0.04 percent -6.02 percent +1.1487 +1.1476

Dollar/Yen -113.9450 113.9000 +0.00% +10.27% +113.9450 +0.0000

Euro/Yen -130.82 130.72 +0.08 percent +3.07 percent +130.8500 +130.7200

Dollar/Swiss -0.9182 +0.01 percent +3.79 percent +0.9182 +0.91

Markets

Treasury yields have increased the spread between five-year U.S. yields and yields of the same tenor in Japan and Germany to its widest since early 2020.

In other news, Japanese wholesale inflation hit a four-decade high on Thursday.

The report’s timing amid staggering lifting of pandemic lockdowns in major cities made the figures difficult to interpret. The market is still giving the Fed some credit for not allowing very high inflation to continue indefinitely.