Dollar dips from 16-month highs as rally takes a pause

LONDON (Reuters) – The dollar slipped back from a 16-month peak on Thursday, losing ground on the euro and Australian and New Zealand dollars as traders assessed whether the U.S. currency’s recent surge was starting to stall.

The dollar has rallied in recent weeks as traders bet on tighter U.S. monetary policy. Stronger-than-expected inflation numbers in the United States last month and punchy retail sales data this week have added to those bets.

And while volatility in FX markets remains low, it is markets’ assessment of global central banks’ differing responses to rising inflation that is driving currencies.

The dollar index, which measures the currency against a basket of six rivals, hit its highest since mid July 2020 on Wednesday at 96.226 was last at 95.694, down 0.1% on the day.

The euro, which was languishing near a 16-month low, rose 0.1% to $1.1334.

The New Zealand dollar jumped 0.6% to $0.7041 after a central bank survey showed near-term inflation is expected to rise in the fourth quarter.

The day before, sterling rose 0.5% to a one-week high against the dollar after a rise in Britain’s October inflation piled pressure on the Bank of England to hike rates at its meeting next month.

The British currency was last at $1.3503, up slightly on the day.

“Our core view is that the dollar can continue its rally against the low yielders, but that these mid-cycle dollar gains, should not stand in the way of some strong performance in the commodity FX space,” ING analysts said in a note.

Other analysts said the dollar strength was not necessarily durable.

“The sustainability of the current dollar strength beyond the next few months looks far from certain,” said Luc Luyet, FX strategist at Pictet Wealth Management.

“Market expectations of the Fed are starting to be particularly hawkish, suggesting limited tailwinds for the U.S. dollar going forward from that factor.”

TURKEY CENTRAL BANK

The big event of the day in FX markets is the Turkish central bank meeting. Traders expect the bank to cut rates even in the face of inflation near 20% and a lira currency hurtling down to repeated record lows.

However, the speed and scale of the lira’s decline – it is close to 11 lira per dollar from below 9.9 lira last week – may stay the bank’s hand, some traders think.

Elsewhere, commodity-linked currencies were hurt by oil prices, which slumped to near six-week lows. [O/R]

The Canadian dollar was at a six-week low. Markets are expecting the Bank of Canada to start raising interest rates early next year. The Norwegian Crown also fell.

The Australian dollar hit a six-week low of $0.7263 but later bounced back aided by the Kiwi’s rally and was last up 0.3% at $0.7286.

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