US dollar holds near 14-month high to euro with focus on inflation

By Ritvik Carvalho

LONDON (Reuters) - The dollar held close to a 14-month high against the euro on Thursday, as a surge in energy prices raised the risk that the U.S. Federal Reserve would act sooner to normalise policy.

The U.S. currency was slightly lower at $1.1563 per euro after strengthening to $1.1529 on Wednesday for the first time since July of last year.

The dollar index, which measures the greenback against a basket of six other major currencies, was little changed at 94.118 following a nearly 0.5% climb over the past two sessions. It was near last week's one-year high of 94.504.

The Japanese yen, another safe haven, was a touch higher at 111.33 per dollar, near the middle of its range of the past week and a half.

Overnight, crude oil rallied to a seven-year high before taking a breather from its recent gains, while natural gas jumped to a record peak in Europe and coal prices from major exporters also hit all-time highs.

The Federal Reserve, which has until now mainly contended that inflationary pressures will prove transitory, has said it is likely to begin reducing its monthly bond purchases as soon as November, before following up with interest rate increases, which could come as early as next year.

The closely watched U.S. non-farm payrolls report on Friday could provide additional clues to the timing of the Fed's next moves. Economists expect continued improvement in the labour market, with a consensus forecast for the addition of 473,000 jobs in September, a Reuters poll showed.

Investors will also be watching a slew of speakers from both the Federal Reserve and the European Central Bank on Thursday. A joint conference on inflation dynamics will be held by the Cleveland Fed and ECB. ECB policymaker Isabel Schnabel speaks at 1400 GMT, while the Fed's Loretta Mester speaks at 1645 GMT.

"The biggest risk to a firmer dollar index probably comes from any substantial re-assessment of inflation risk from the European Central Bank," ING strategists said in a note.

A Reuters poll of FX strategists found that the majority expect the dollar to remain dominant in the near term before ceding ground to its peers in a year.

"One of our key calls for (the fourth quarter) has been that the high-yielding, safe-haven USD should remain resilient as the Fed moves closer to taper in coming weeks and a debt ceiling resolution boosts the supply of U.S Treasuries," said Valentin Marinov, head of G10 FX research at Credit Agricole.

"More recently, concerns about soaring energy and electricity prices as well as a slowdown in China have been driving the G10 FX price action as well and, in our view, could further boost the USD appeal."

Elsewhere, jitters around the U.S. debt ceiling - which had supported the dollar - eased after the Senate appeared near to a temporary deal to avert a federal debt default in the next two weeks.

The Senate's top Republican, Mitch McConnell, proposed that his party allow an extension of the federal debt ceiling into December.

In the digital currency space, bitcoin, the world's biggest cryptocurrency by market value, hovered near an almost five-month high of $55,800 touched on Wednesday, last trading at around $54,686.

 

(Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland in Tokyo; Editing by Susan Fenton and Edmund Blair)