US dollar climbs as inflation builds the case for higher rates

New York

THE dollar index continued to rebound from prior-day losses on Friday (Oct 29) after US government bond yields rose on news that the Federal Reserve's preferred inflation measure showed prices continuing to rise faster than its 2 per cent target.

The euro, which has a heavy weighting in the dollar index, plunged 1.05 per cent against the greenback - the most since at least June. The euro's drop helped drive the dollar index up 0.8 per cent to 94.102 in the afternoon in New York.

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 per cent and the Swiss franc by 0.7 per cent.

Volatility in the foreign exchange and interest rate markets has increased throughout the week around central bank actions and economic data. This week could bring more of the same around policy meetings of the US 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 and some of the trades were likely "window-dressing".

US interest rate markets have been unusually volatile as traders prepare for the Fed to raise rates around mid-2022.

ECB President Christine Lagarde's failure at 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 US$1.10 over the next 12 months.

Elsewhere, the British pound fell 0.7 per cent to US$1.3698. The dollar gained 0.3 per cent against the Japanese yen to 113.92505.

The Australian dollar slipped 0.3 per cent to US$0.7521. REUTERS