Dollar falls on euro strength after ECB meeting as rates move

  • Euro gains nearly 0.7% to $1.168
  • U.S. dollar index falls to 93.3560
  • BoJ gives another dovish outlook on inflation
  • Reserve Bank of Australia fuels rate-hike wagers

NEW YORK/LONDON, Oct 28 (Reuters) – The euro rose sharply against the U.S. dollar on Thursday as foreign currency traders sorted through moves in the interest rate markets and comments by the European Central Bank President Christine Lagarde.

The euro rose nearly 0.7% to at $1.168 at 1425 GMT. The dollar index of major currencies fell 0.6% to 93.3560.

The volatility came in a busy day of central bank-driven activity that started in Australia and Japan and precedes a meeting of the U.S. Federal Reserve next week.

“The market is very much triggered and sensitive to inflation worries and this notion that central banks are behind the curve,” said Mazen Issa, senior currency strategist at TD Securities.

Exchange rate movements picked up on Wednesday when the Bank of Canada made hawkish comments. The markets had been on pause early at the start of the week.

A contributing factor to the volatility, Issa said, is the approaching end of the month when more investment managers rebalance their portfolios across currencies.

Currency traders are trying to predict the direction of interest rates and their inflation-adjusted differences across currencies.

Interest yield curves have flattened, suggesting to some that central banks will have to sacrifice some support for the pandemic recovery by allowing interest rates to rise to try to hold back inflation.

Before Lagarde spoke in a press conference, the euro moved little as the ECB, as expected, kept policy unchanged, reaffirming its plan to keep buying bonds and hold down interest rates for years to come. read more

But some saw Lagarde’s comments as not as forceful in affirming the ECB’s dovish position as the market expected.

Earlier on Thursday the Reserve Bank of Australia declined to buy a government bond at the heart of its stimulus programme and the Aussie dollar fell in response to speculation the central bank will allow rates to rise earlier than expected. L1N2RO015

The Aussie initially fell 0.5% after the RBA statement but soon erased those losses and was 0.3% against the U.S. dollar at 1425 GMT.

The Bank of Japan, as expected, stuck with its dovish stance at its meeting and the yen showed no reaction. read more

Against the yen the dollar gained about 0.4% to 113.38 per dollar.

The BoJ cut its consumer inflation forecast for the year ending in March 2022 to 0% from 0.6% and, as expected, the overall takeaway reinforced market bets it will lag other central banks in dialling back crisis-mode policies.

A U.S. government report of third-quarter gross domestic product showed no immediate impact on the dollar. The report had been expected to be weak but not matter much to the greenback because more recent economic data has been stronger.

In cryptocurrencies, bitcoin rose 5% to $61,423.

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Currency bid prices at 10:25AM (1425 GMT)

Reporting by David Henry in New York and Tommy Wilkes in London. Editing by Christina Fincher and Barbara Lewis

Our Standards: The Thomson Reuters Trust Principles.

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