Dollar rises with Treasury yields, as euro losses deepen

The dollar bounced back on Friday from a prior day plunge after yields on government bonds rose and traders saw new inflation reports as challenging major central banks to pull back on asset purchases more quickly than planned.

The dollar index was up nearly 0.5% in the morning in New York after having lost nearly 0.6% on Thursday.

The euro fell 0.6% to $1.1609 just one day after having booked its biggest daily percentage gain in five months.

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.

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 0.2% against the Japanese yen to 113.765 .

The British pound fell 0.3% to $1.3746 .

The Australian dollar slipped 0.3% to $0.7521 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 2% on the day, while bigger rival bitcoin gained 1% to $61,323.