Dollar at 18-Month High Supported by Inflation Concerns

Otto Shinohara, investment analyst at Messiro Currency Management, said that the higher-than-expected rise in core inflation raises concerns that energy-driven inflation will spill over into other sectors of the economy, adding that US interest rate expectations rose following the data release.

The dollar index, which measures the US currency's performance against a basket of six major currencies, rose 0.68% to 102.86 points, its highest level since April 2025, surpassing the previous session's losses.

The inflation data overshadowed earlier dovish signals from Federal Reserve officials, including remarks by New York Fed President John Williams, which weighed on the dollar in the previous session.

Federal Reserve Vice Chair for Supervision Michelle Bowman also indicated a wait-and-see approach before making a decision on raising interest rates again.

According to CME Group's FedWatch Tool, traders are pricing in a 56% probability that the Fed will keep interest rates unchanged at its scheduled October 27-28 meeting, compared with 53% a month ago, while markets expect about 79 basis points of monetary tightening by late 2027.

The Fed raised its benchmark interest rate by a quarter of a percentage point last month to a range of 3.75% to 4%.

Euro Retreats

The euro declined under pressure from rising oil prices and concerns over France's fiscal situation, amid investor anxiety that political wrangling ahead of next year's presidential election could derail deficit-reduction efforts.

European Central Bank President Christine Lagarde said at an event organized by CNN in Bangkok that France must address its debt problems through fiscal consolidation, limiting speculation about a potential ECB intervention to buy French bonds to curb yields.

The euro fell 0.69% to $1.1121, hitting a 17-month low against the dollar and a 16-month low against the British pound.

UniCredit currency analyst Roberto Mialich said the euro could test the $1.10 level in the near term, but expressed a less pessimistic outlook for the currency towards the end of the year, suggesting that US bond yields could fall, despite pressures the euro might face due to conditions in the single currency zone.

These developments coincide with the annual meetings of the International Monetary Fund and the World Bank in Bangkok, where IMF officials called for curbing mounting debt, while IMF Managing Director Kristalina Georgieva emphasized the need for the US to undertake fiscal adjustments to put its debt on a more sustainable path.

The British pound and the yen

In Britain, the Financial Times reported on Wednesday that the Chancellor of the Exchequer is expected to fund new spending measures in this month's budget through tax increases or spending cuts, rather than increased borrowing.

A senior IMF official said the fund is not recommending that Britain accelerate the pace of its fiscal consolidation.

The British pound fell 0.58% to $1.3178, while the Japanese yen dropped 0.33% to 158.81 per dollar.