Dollar Continues to Soar After U.S. CPI; Euro Clings to Parity

The U.S. dollar surged higher in early European trade Thursday, continuing its seemingly relentless march higher on the back of expectations of further hefty rate hikes by the Federal Reserve after the release of the latest red-hot inflation data.

At 3:15 AM ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.6% higher to 108.430, just below the two-decade peak of 108.560 it reached earlier this week.

The gains followed Wednesday’s release of the June U.S. CPI, which soared 9.1% year-on-year, climbing to a new four-decade high.

This raised expectations that the Fed could raise rates by an enormous 100 basis points at its meeting this month rather than the 75 bps that had been expected.

These expectations were reinforced by comments from Fed Bank of Atlanta President Raphael Bostic, who said “everything is in play” to combat price pressures, implying a full percentage point was a distinct possibility.

Additionally, Fed Bank of Cleveland President Loretta Mester told Bloomberg that the central bank will need to go well beyond the neutral level of rates to combat the soaring inflation.

EUR/USD fell 0.4% to 1.0017, having briefly fallen below parity on Wednesday for the first time since late 2002.

The European Commission is set to announce new economic forecasts later in the session and is set to dramatically cut its GDP forecast for 2022 and 2023, according to a draft of the projections seen by Bloomberg, on the back of the war in Ukraine, surging prices and the danger of winter energy shortages.

This places the European Central Bank in a difficult situation as a weaker currency runs the risk of pushing up already record-high inflation, yet any move by the ECB to respond with its own version of rapid interest rate hikes would increase the pressure on an economy already hit hard by high energy costs.

USD/JPY rose 1% to 138.72, climbing to levels not seen since September 1998, in the wake of U.S. 2-year Treasury yield climbing to 3.1964%, just off an overnight four-week high, way above the U.S. benchmark 10-year yield of 2.9340%.

USD/CAD rose 0.4% to 1.3018, with the greenback regaining some ground after the Bank of Canada surprised markets on Wednesday, with a percentage-point rate as the central bank felt that it was necessary to front-load interest rate increases to ensure that high inflation does not become entrenched.

AUD/USD inched down to 0.6759, NZD/USD fell 0.3% to 0.6115, while USD/CNY rose 0.3% to 6.7411.