WEDDING, November 12 - The dollar went higher for a 3 rd consecutive day on Friday as a surprisely strong U.S. inflation print shocked markets and encouraged investors to take their bets on a U.S rate increase to as early as mid 2022.
When short-dated U.S. Treasury yields edging higher - five-year bond yields rose to a February 2020 high - investors started to bet that the U.S. policymakers will be forced to raise interest rates sooner than later.
The dollar index firmed 1% to 95.27, its highest level since July 2020, against a basket of its rivals. The dollar's push higher this week has seen it break above a two-month trading range with analysts predicting more gains.
We don't think that this is the end of the move and expect the U.S. dollar to remain strong in the first half of 2022 as the Fed's taper coming to a conclusion and a rising rate increase will offer support for the dollar in this period, said Mizuho strategists.
The renewed strength of the dollar has given traders new life as traders have scrambled to buy options to protect themselves against further dollar strength. A currency volatility index hit a new 6 month high.
The Fed's contention that price pressures will be transitory on Wednesday, calling into question the Fed's contention that policymakers would lift interest rates sooner than expected, because of a rise in U.S. consumer prices last month.
Markets price a first rate increase in July and a higher likelihood of another in November. The rate increase is 50% higher than the rate increase in less than 30% a month earlier, compared to less than 30% a month earlier.
The euro stood back to a 16 month low at $1.1436, and the sterling dropped to $1.3354, its weakest level this year.
The European Central Bank is unlikely to change its extremely dovish policy setting in the near term against a slowing economy, as investors are increasingly bearish on the outlook for the single currency.
The risk-sensitive Australian dollar reached its low as low as $0.7277 for the first time in more than a month, while in cryptocurrencies, it traded just south of $65,000, down from a record $69,000 earlier in the week.