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Dollar Climbs to 2021 Highs; U.S. CPI Points to Early Fed Hikes

The dollar traded higher Thursday, climbing to 2021 highs, as soaring U.S. inflation lifted expectations that the Federal Reserve will start raising interest rates relatively soon.


At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 95.073, a level it last saw in June 2020.


EUR/USD dropped 0.1% to 1.1473, just above Thursday’s 1.1465 low, its weakest level since July 2020. USD/JPY rose 0.1% to 114.02, close to a three-year high, after Japanese wholesale inflation hit a four-decade high. In contrast to the Fed, neither the European Central Bank nor the Bank of Japan are expected to tighten monetary policy noticeably for the foreseeable future.


The dollar's advance follows Wednesday’s release of U.S. consumer prices data, which showed that prices grew at their fastest annual pace since 1990 in October and raised fresh doubts about whether the Fed can afford to sit on its hands until at least the end of next year, as its most recent guidance suggests. Price rises were both higher than expected and broad-based - and would have been even worse without a temporary drop in air fare prices due to Delta-variant Covid-19.


The currency move was also supported by a surge in Treasury yields, with the difference between 5-Year U.S. yields and the equivalent yields in Japan and Germany has grown to the widest level since early 2020. Bonds had sold off in the U.S. on Wednesday after a weak auction of 30-year debt.


“The broadening of the inflation picture continues into 2022 as wage growth tends to accelerate the price pressure in broader terms, hence the Fed will get increasing evidence of a broader price pick-up,” said analysts at Nordea, in a note. “This supports our view of a swifter than currently projected tapering path and three rate hikes in 2022.”


Elsewhere, GBP/USD fell 0.1% to 1.3390, dropping to a fresh 11-month low. The U.K. economy grew by 0.6% in September but estimates for previous months were revised lower, leaving GDP 0.6% smaller than it was in February 2020. The Polish zloty continued to weaken against both the euro and the dollar, amid the ongoing standoff with migrants on the Belarusian border that has caused the latest diplomatic crisis between Belarus and Europe.


AUD/USD dropped 0.2% to 0.7311 after the jobs report in Australia showed an unexpected rise in

unemployment in the middle of a pandemic lockdown.

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