LONDON – The dollar hit a 16-month high on Thursday and bond market borrowing costs were nudging up again, after the strongest US inflation reading in over three decades fuelled expectations of Federal Reserve interest rate hikes next year.
The dollar index, which gauges the currency against six peers including the yen and euro, continued to make steady progress in Europe after Wednesday’s consumer price data spurred its biggest jump since March.
They had shown the biggest inflation gain in four months, lifting the annual increase to 6.2 per cent, the strongest year-on-year rise since November 1990.
The dollar pushed the euro below $1.15, leaving the next major chart support level down at $1.12. European stocks shuffled higher, sensing the potential for a competitiveness boost, but Japan’s yen was falling towards a four-year low at 114.15 per dollar.
“There wasn’t a single element of the CPI data that drove the upside surprise yesterday, it was just everywhere,” said Societe Generale FX strategist Kit Juckes.
“You can’t ignore something that broad-based and it will reinforce the view that the Fed is going to hike next year.”
Wall Street was expected to see a modest rebound later having had its worst day in over a month after Wednesday’s data. US bond markets were closed for a holiday but Europe’
Benchmark 10-year yields were around two basis points higher across Europe, firmly above lows hit in the past week as central banks including the ECB talked down aggressive market pricing on rates.
US Treasury yields had leapt by the most since February on Wednesday to nearly 1.6 per cent. US real yields, which take inflation into account, dipped to record lows and the five-year breakeven rates hit a record 3.113 per cent.
“The inflation numbers surprised on the upside, and they may not even be the peak,” said ING economist Rob Carnell.
“The market thinks the Fed, and most other central banks, are behind the curve,” meaning a more rapid tightening than policy makers have so far communicated, he said. “Risk assets hate this.”
China and Japan’s stock markets also rose overnight. China’s markets were supported by property giant Evergrande avoiding default again and hopes Beijing would give the broader sector support, while the Nikkei was helped by the weaker yen, which aids exporters.
Chinese blue chips rallied 1.6 per cent. Evergrande jumped nearly 7 per cent. Japan’s Nikkei ended up 0.6 per cent while the yen weakened as far as 114.15 per dollar from as strong as 112.73 earlier this week.
