U.S. dollar rises to 94. 5 - yr-old inflation forecast

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U.S. dollar rises to 94. 5 - yr-old inflation forecast

Tokyo, Oct 14 Reuters -- The U.S. dollar rose against major peers on Thursday, taking a breather from an rally which had lifted it to a one-year high powered by expectations for faster Federal Reserve interest rate hikes.

The Dollar index, measured against six rivals, was about flat at 94.048, after dropping 0.53% on Wednesday, the most since Aug. 23.

The index reached 94.563 on Tuesday, its highest since September 2020, after expanding nearly 3% since early last month.

The dollar pulled back even after minutes of the Federal Open Market Committee's September meeting confirms that tapering of stimulus is all but certain to start this year and showed a growing number of policymakers worried that high inflation could persist.

A Labor Department report showed U.S. consumer prices rose in September, and are likely to rise further amid a surge in energy prices, potentially pressuring the Fed to act sooner to normalise policy.

Most Fed officials, including chairman Jerome Powell, have so far contended that price pressures will be transitory.

The U.S. five-year, 5-year-forward breakeven inflation rate one of the more closely followed gauges of long-term inflation expectations surged in seven years at 2.59% overnight.

Money markets are pricing about 50 50 odds of the first 25 basis point rate hike in July.

The USD's reaction could be an example of 'buy the rumour, sell the fact", Joseph Capurso, a strategist with Commonwealth Bank of Australia, wrote in a client note.

We consider the FOMC's assumption of transitory spike inflation in Europe to be wrong. In our view a more aggressive tightening cycle will support the USD. The dollar rose 0.26% to 113.55 yen but still hit the three-year high of 113.80 yen overnight.

The euro was mostly flat from Wednesday at $1.15935, but clocked 1.1601 earlier for the first time since Oct. 5 at the flat rate of above 2.00%.

Sterling edged up to $1.3666, this month extending Wednesday's 0.55% advance and nearing its highest level this month.

Westpac expects the US Dollar to fall another leg higher over the next few months.

More robust growth for the United States economy in a weaker relationship with the acceleration seen in Europe and to a lesser extent, the UK will weigh on the Euro-Scottish currency, the bank strategists wrote in an e-paper.

Substantial U.S. fiscal stimulus has already been priced into the dollar, but is not certain to pass through Congress, they said, forecasting the dollar index to drop to 91.50 by March, with the euro rising to $1.20, while sterling gains to $1.1.41 in the latter half of next year.

Meanwhile, the Australian dollar was 0.09% higher at $0.7387 and earlier touched $0.7396, its highest since Oct. 10.

The New Zealand kiwi dollar added 0.16% to $0.6977, reaching for the first time since 28 Sept and adding $0.6982 for earlier releases since then.