By David Henry
NEW YORK (Reuters) – The dollar continued to rebound from prior-day losses on Friday as the euro plunged and currency and bond markets tried to sort through inflation reports and central bank comments amid end-of-month position adjustments.
The dollar index was up 1% around noon (1600 GMT) in New York, more than reversing Thursday’s loss of nearly 0.6%. The move put the dollar on track for its biggest one-day gain since at least June and near a one-year high reached 17 days ago.
The euro fell more than 1% in its biggest daily percentage loss since March 2020. On Thursday the euro booked its biggest daily gain in five months.
The British pound fell 0.8% to $1.3680.
Volatility in the foreign exchange and the interest rate markets has increased during the week as they tried to digest central bank actions and economic reports. Next week could bring more of the same around policy meetings of the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia.
“A source of volatility could be this discrepancy between what the markets are saying and what the central banks are saying,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Month-end adjustments of positions are another factor, Chandler said.
U.S. Treasury yields rose after the government’s index of core personal consumption expenditures – the Fed’s preferred inflation measure – climbed 0.2% in September, showing an increase of 3.6% over 12 months.
U.S. interest rate markets have been unusually volatile as traders prepare for the Federal Reserve to raise rates around mid-2022.
European data on Friday showed inflation in the 19 countries sharing the euro rose to 4.1% in October from 3.4% a month earlier, beating a consensus forecast of 3.7% and creating a policy dilemma for the European Central Bank.
Germany’s 10-year bond yield rose on Friday as much as 8 basis points to its highest level since May 2019 and Southern European government bond yields surged.
ECB President Christine Lagarde’s failure during a Thursday press conference to push back against market expectations of higher interest rates has brought out bears, with Danske Bank strategists expecting the euro to fall to $1.10 over the next 12 months.
“Investors are just not buying what the ECB is saying,” said Marios Hadjikyriacos, a senior investment analyst at brokerage XM. Markets are betting that inflation will force the ECB to pull back on asset purchases sooner than planned.
Elsewhere, the dollar gained 0.4% against the Japanese yen to 114.065.
The Australian dollar slipped nearly 0.5% to $0.7509 after reaching the highest since early July at $0.75555 in the previous session.
In cryptocurrencies, ether rose to a record $4,400 and was up 3% on the day, while bigger rival bitcoin gained 3% to $62,296.
(Reporting by David Henry in New York and Saikat Chatterjee in London. Editing by Angus MacSwan and Raissa Kasolowsky)
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