Dollar climbs against euro as US inflation rate increases

The dollar climbed to a seven-month high against the euro as the rate of US inflation increased in October, fuelling speculation the Federal Reserve will raise interest rates from near zero as soon as next month.

It strengthened for a third day against the euro as a separate report showed factory output increased in October for the first time in three months.

The euro dropped versus most of its major peers as ECB executive board member Peter Praet said policymakers see a risk that investors and consumers will lose faith in officials’ projections for reviving inflation.

“The environment is more dollar-positive,” said Georgette Boele, a currency strategist at ABN Amro Bank in Amsterdam.

“The momentum was already optimistic and the CPI data has not taken that away,” said Ms Boele, whose bank expects the dollar to strengthen to $1.05 against the euro by the end of the year.

Hedge funds and other large speculators boosted bets on dollar gains versus eight major currencies in the last three weeks, in the biggest jump since March 2013.

“It looks like a big bet on the Fed finally putting its money where its mouth is,” said Sean Callow, a foreign-exchange strategist at Westpac Banking in Sydney.

“It looks as though the Fed will indeed kick off its tightening cycle in December, providing a stark contrast to other major central banks and thus providing durable support for the dollar.”

In a statement on the day of the Fed’s October policy meeting, officials dropped a reference to global risks and referred to their next meeting on December 15-16 as they discussed lift-off timing.

Futures show a 68% chance the Federal Open Market Committee will announce a rate increase by December 16, up from a 50% probability at the end of October.

The calculation is based on the assumption that the effective fed funds rate will average 0.375% after the first increase.

The ECB meets on December 3 amid speculation it will increase efforts to bolster inflation and economic growth in the region.

The euro weakened against most of its 16 major peers after Mr Praet said the economic recovery was “fragile”, as are inflation expectations.

He added that the central bank is concerned about persistent miscalculation of how long it will take to return inflation towards its goal.

The repeated extension of this horizon can bring into question the credibility of monetary policy, he said.