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 0.1 per cent to $1.15, 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 at 6.2 per cent in the 12 months to October, 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.
“Markets responded by bringing forward their pricing of the first rate hike to the [Fed’s] July 2022 meeting,” Deutsche Bank strategist Jim Reid said.
Federal Reserve chair Jay Powell 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 long-held view that consistently high levels of inflation were “transitory”, and driven by supply and demand imbalances and the reopening of the economy from 2020’s shutdowns.
“Investors have to decide whether the Fed and other central banks’ dovish forecasts and policy stances will be robust in the face of a few more months of difficult inflation releases,” Standard Chartered strategist Steve Englander said.
The CPI data was “as bad as it looks”, Englander said 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 by 0.45 per cent from September to October.
Meanwhile, European Central Bank president Christine Lagarde said late last month that currently 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.
ECB board member Isabel Schnabel also signalled in a speech earlier this week that the eurozone central bank may keep its main deposit rate below zero until after it ends its crisis-fighting bond-buying programme.
European equities drifted close to record highs, having rallied in recent weeks as strong corporate earnings suggested companies had managed to pass higher costs on to consumers.
The regional Stoxx Europe 600 share index rose 0.1 per cent, while Germany’s Xetra Dax fell 0.1 per cent. London’s FTSE 100 gained 0.4 per cent as exporters were boosted by the weak pound.
Futures contracts tracking the US S&P 500 share index gained 0.3 per cent as investors judged stocks to be less affected by inflationary concerns than fixed income-paying government debt securities.
According to research house DataTrek, during the high inflation period of 1972 to 1980, S&P companies’ profits grew 120 per cent, slightly outpacing an aggregate 110 per cent rise in consumer prices over the same period.
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.