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Currency Market Analysis

Nov 11, 2021 | Currency Market Analysis

Global Themes

The highest U.S. inflation in decades put a stronger wind at the dollar’s back as it scaled 15-month peaks against a basket of rivals. The dollar’s offensive explosion knocked the euro and sterling to new 2021 lows, and pushed the Canadian dollar to its weakest level in over a month. The greenback burst out of its range after U.S. consumer inflation topped 6% in October, the highest since 1990, and well above forecasts of 5.8%. With inflation so far proving more longer lasting than transitory, it suggested the Fed may be at or near the front of the pack in raising interest rates. Expectations that the Fed may be forced to move sooner than expected to raise rates pushed Treasury yields higher. The 10-year Treasury closed near 1.57% Wednesday after ending Tuesday below 1.44%. For the Veterans Day holiday, stocks are open but bonds are closed.


The euro remained on the defensive after the inflation-boosted greenback hammered it to 15-month lows. Divergent central bank policy is considered a bigger vulnerability for the euro if the hottest U.S. inflation in decades should lead the Fed to tighten monetary policy sooner than markets currently anticipate.  


Sterling plunged to its lowest level in more than 10 months as weaker than expected UK growth last quarter collided with a stronger greenback. Snarled supply chains contributed to the UK economy slowing to a 1.3% pace of quarterly growth during the July-September period, below forecasts of 1.5%, and a sharp slowdown from more than 5% in the spring. Weaker growth validated the Bank of England’s steady hand on lending rates last week.


Canada’s loonie fell to five-week lows amid uncertainty about whether Ottawa would raise interest rates before Washington. The Fed appears a lot closer to the front of the G7 pack when it comes to rate hike expectations, following the hottest U.S. consumer prices in three decades. The loonie’s weaker bias also stems from oil’s slide below $81 from $84 on Tuesday. The Bank of Canada has penciled in a rate hike for around the middle quarters of 2022, a timeframe that may include the Fed if U.S. inflation continues to climb.

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