US dollar rises as inflation data revive 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 0.3 per cent to $1.145, 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 October from a year ago, 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.

Jay Powell, Federal Reserve chair, 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”, 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”, said Steve Englander, Standard Chartered strategist, 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, Christine Lagarde, European Central Bank president, 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.

Isabel Schnabel, ECB board member, 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 were little changed, with the benchmark S&P 500 doing just enough to snap its two-day losing streak with a gain of less than 0.1 per cent.

The technology-heavy Nasdaq Composite regained 0.5 per cent after suffering a 1.7 per cent drop on Wednesday.

A combination of strong earnings and encouraging economic data have helped push stock markets to record highs in recent weeks, and they remain close to their peaks despite the recent pullback.

Many investors judge stocks to be less affected by inflationary concerns than fixed income-paying debt securities. 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.

Europe’s Stoxx 600 share index closed up 0.3 per cent, while London’s FTSE 100 gained 0.6 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.

Additional reporting by Nicholas Megaw in New York