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The euro fell below parity to the dollar on Thursday, succumbing to the power of a rampant buck as traders raised bets that surging U.S. inflation will force the Federal Reserve to raise interest rates at a faster pace than its central bank peers.
The euro
EURUSD,
was down 0.8% to trade at 0.9980 per dollar, having earlier touched 0.9950. The U.S. currency gained 0.8% to $1.1792 per British pound
GBPUSD,
and climbed 1.3% to 139.16 yen
USDJPY,
the weakest for the Japanese unit since 1998. Together these moves pushed the dollar index
DXY,
up 1.2% to 109.17, its highest since 2002.
The dollar’s fresh rally came after a U.S. consumer prices report released on Wednesday showed inflation running at 9.1%, the fastest pace in 41 years. Traders have swiftly added to bets that the Federal Reserve will be forced to raise interest rates aggressively. Futures markets are pricing in an 83.3% chance the Fed will hike its benchmark interest rate by 100 basis points to a range of 2.5% to 2.75% at its meeting in less than two weeks.
By contrast the ECB appears on course to only increase its deposit rate from minus 0.5% to above zero by September. Consequently, the difference between German 2-year bond yields and U.S. 2-year Treasuries has jumped to 269 basis points, making U.S. paper its most relatively attractive in more than three years, potentially adding to the demand for dollars.
Adding to concerns about the euro was signs of fresh political turmoil in Italy, where former ECB president Mario Draghi’s government narrowly averted a no-confidence vote.
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