Dollar pulls back from one-year high after inflation data

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FILE PHOTO: A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo

By John McCrank

NEW YORK (Reuters) -The dollar fell from its one-year high on Wednesday as longer-dated Treasury yields dipped after U.S. inflation data showed prices rose solidly last month, while the minutes from the Federal Reserve’s September meeting confirm tapering will begin “soon.”

The consumer price index rose 0.4% last month versus a 0.3% rise anticipated by economists polled by Reuters. Year-over-year, the CPI increased 5.4%, up from 5.3% in August. Excluding the volatile food and energy components, the so-called core CPI climbed 0.2% last month versus 0.1% in August.

Yields on shorter-term Treasuries, which typically move in tandem with interest rate expectations, increased after the report, while longer-dated yields dipped, indicating the market is still not pricing in a sustained period of inflation. [US/]

The gap between the two- and 10-year Treasury notes closed to its narrowest in two weeks after having widened to a 3-1/2-month high on Friday.

“The market is now seeing a major pivot here as far as how inflation is showing more signs of being persistent than transitory, and that’s likely to force the Fed’s hand to deliver a rate hike well in advance of what people were anticipating,” said Edward Moya, senior market analyst at Oanda.

The market had been pricing in a rate hike for December 2022, but now it is eyeing September of that year, he said.

The greenback initially moved higher after the CPI data, touching a nearly three-year high versus the Japanese yen, before edging lower along with the longer-dated bond yields.

The dollar index, which measures the greenback against six rivals, was last down 0.515% at 94.036 from Tuesday, when it touched 94.563, its highest since late September 2020.

“The dollar has had a significant move higher and it’s been ripe for a pullback here, and I think this is going to likely trigger that,” Moya said.

The dollar slid 0.29% versus the yen to 113.275 yen.

The euro was up 0.56% at $1.15945, rebounding from its nearly 15-month low of $1.1522 hit in the previous session.

A surge in energy prices has added to inflation concerns and stoked bets the Fed may need to act faster to normalize policy than previously projected.

The commodity-linked Aussie dollar rose 0.35% to $0.7370, close to its one-month high of $0.7384 hit on Tuesday.

The minutes from the Fed’s September policy meeting signaled that the central bankers could start tapering their crisis-era support for the economy in mid-November, though they remain divided over how much of a threat high inflation poses and how soon they may need to raise interest rates in response.

“Tapering is baked in the cake,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

“The bigger question is will the inflation dynamics lead them to be more aggressive and quicker in raising interest rates? So interest liftoff now becomes the big focus for the markets, and that’s where we’re really seeing price action along the yield curve,” she said.

Fed Governors Lael Brainard and Michelle Bowman were due to speak later on Wednesday.

In cryptocurrencies, bitcoin traded up 1.88% at $57,048.91, after reaching a five-month high of $57,855.79 at the start of the week.

(Reporting by John McCrank; Editing by Carmel CrimminsF, Giles Elgood and Jonathan Oatis)

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