SYDNEY: The dollar stood at its highest levels of the year against sterling and euro on Thursday, while the euro was smarting from its sharpestdrubbing in a month, after the hottest US inflation reading in a generation fanned bets on rate hikes.
The euro was down 1 percent, because of major support to US $1.1456, its lowest since July 2020, after the US CPI came in at 6.2 per cent overnight. It was coinned at that level early in the Asia session and lack chart support until around US $1.12.
The dollar slumped 1.2 percent to $1.3401, its lowest since December 2020, and the euro slumped 0.8 percent to 114.00 per dollar.
The dollar's broad rise has resulted in a drop in two months as the European Treasury yields surged, with MSCI's EM currencies index making its sharpest drop in two months.
The Fed will increase rates if prices keep higher, said National Australia BankAustralia Bank's head of FX strategy, Ray Attrill, traders believe that the rates moves, especially at the short end.
He said the market is still giving a degree of credibility to the Fed that it is not going to allow high inflation to continue indefinitely. He said if the dollar index goes higher than 95 investors might be out of the way.
It's a big level technically and if we can break up through that, there will be more people throwing in the towel. The index has climbed as far as 94.905.
The US data showed a rise in rents, which could drive pressure on wages and lengthen and broaden the pandemic's inflationary pulse.
The difference between five-year US yields and yields at the same tenor in Japan and Germany are at their widest since early 2020, in favor of Treasuries.
The Australian and New Zealand dollars fell against the dollar's broad rise on Wednesday but have found support at a one-month lows as investors figure that rates are going up to counter inflation in the Antipodes.
The Aussie steadied at US $7331 in Asia and the kiwi at US $7065.
Australian labour data is due at 12.30 am GMT but analysts say it will be difficult to interpret as the survey period only partially covers the reopening of major cities from pandemic-imposed restrictions.
The dollar gains will likely be dependent on clues about the Fed's next moves, as well as on whether the inflation jump - which also caused selling in stock markets - does give a further weight on the mood.
We're in a stand-off from an FX stand point, said Alan Ruskin, the Deutsche Bank strategist.
On the dollar we have the classic dilemma - if Fed won"t respond to high inflation it is dollar negative; if the Fed brings forward tightening it is USD positive. The dollar is stuck between these two worlds right now. The British growth data will be available later in the day.