The dollar surges to 16-month highs after U.S. inflation

On Thursday, the dollar surged to 16-month highs while the euro and other currencies started to decrease in value. The yen went back to its multi-year lows after the U.S. inflation.

Last month, data showed that U.S. customer prices increased at their fastest annual speed since 1990. Traders think the Federal Reserve could react by raising interest rates quicker than in Japan or in Europe.

The euro started to drop after the European Central Bank began procrastinating on policy tightening. On Thursday, it slipped to $1.1455, which seemed to be its lowest since the beginning of 2020.

A strategist at Deutsche Bank, George Saravelos, talked about the rising Covid cases in Europe and China. He said that it is hard to see relative growth under-performance change any time soon with all of these events. He added that the euro could decline as far as $1.13.

Sterling also appeared down at a new 11-month low of $1.3366.

The yen stretched a sharp reversal of recent increases to fall to 114.16 per dollar. It is close to a four-year low of 114.79 for the currency of Japan reached last month. The dollar in Australia and New Zealand recorded one-month dips.

Against a box of currencies, the dollar surged to as high as 95.102, its strongest since the beginning of 2020.

Overview of the situation

The aggressive repricing of Fed policy expectations strengthened the upward momentum of the U.S. dollar from the previous week.

A currencies analyst at MUFG, Lee Hardman, said that previously it had already benefitted from the other central banks pulling back against rate hike expectations outside of the U.S.

The U.S. government bond yields have increased sharply. That includes the 30-year Treasury yield reaching 1.5%.

After the rise in Treasury yields, which happens when bond prices decline, the difference between yields at the same trend in Japan and Germany and five-year U.S. yields is wider. It is clear now than at any time since the beginning of 2020.

MSCI’s E.M. currencies index is suffering its sharpest decline in two months, with Emerging market currencies also suffering from the surge of the U.S. dollar.

The Australian and New Zealand dollars moved, dragged lower by the surge in the U.S. dollar. The Aussie dollar fell 0.5% to a one-month low of $0.7288, and the Kiwi also experienced a fall of around 0.7% to $0.7014.