US Dollar Strengthens on Higher Inflation, Growing Expectations of Fed Rate Hike

The US dollar strengthened in global markets on Wednesday as higher-than-expected inflation in the United States and hawkish signals from Federal Reserve officials fuelled expectations of further monetary tightening.

Analysts said the dollar was gaining ground amid growing expectations that the US Federal Reserve (Fed) could raise interest rates in December.

The dollar index, which measures the US currency against a basket of six major currencies, rose 0.2 per cent to 102.4 on Wednesday, hovering near its highest level in almost two weeks. The index had gained 0.5 per cent on Tuesday.

Data released on Tuesday showed that US consumer prices rose more than expected in October. Higher food and housing costs pushed inflation above analysts' forecasts for the third consecutive month.

Rory Glass, an official at London-based foreign exchange trading firm Marex, said expectations that the Federal Reserve could maintain a tighter monetary policy were continuing to provide significant support for the dollar.

Meanwhile, the euro slipped slightly to $1.114 against the dollar. The European currency had fallen by more than 0.5 per cent on Tuesday.

Data released on Wednesday showed that inflation in Germany declined to 2.8 per cent in October, in line with previously published preliminary estimates.

The British pound fell 0.2 per cent to $1.332, trading near its lowest level in two weeks. The Swiss franc dropped 0.4 per cent, reaching its weakest level in two weeks, while the Japanese yen declined 0.1 per cent.

At one point, the yen weakened to nearly 160 per dollar, approaching a seven-week low.

However, the Australian dollar was the only currency among those of the 10 major developed economies to gain against the US dollar, rising 0.1 per cent. The Australian currency had previously fallen to its lowest level in seven months.

Recent comments from several voting members of the Fed's interest-rate-setting committee have highlighted concerns about persistently high inflation, strengthening expectations of a rate increase next month.

According to the CME FedWatch Tool, market participants are now almost certain that the Federal Reserve will raise interest rates by 25 basis points in December.

Traders are also pricing in a small possibility of a 50-basis-point increase next month.

Data compiled by LSEG indicate that markets are anticipating cumulative rate increases of around 75 basis points by September next year.

Following Tuesday's inflation report, several investment firms revised their forecasts for the Fed's future monetary policy.

Goldman Sachs now expects the Federal Reserve to raise interest rates in December and again in March next year. Deutsche Bank, meanwhile, expects rate increases in December, January and March.

So far this year, the US dollar has gained against the currencies of most developed economies, with the Australian dollar and Norwegian krone among the few exceptions.

Widening interest-rate differentials have increased investor appetite for the dollar. Analysts also believe that the ongoing US-Israel war involving Iran has boosted demand for the currency as a safe-haven asset.

In cryptocurrency markets, Bitcoin fell 0.1 per cent to $73,672.80, trading near its lowest level in more than two months.

Ether, meanwhile, remained almost unchanged at $2,055.50.