The US dollar extended broad-based gains on Wednesday after marginally higher-than-expected US inflation data coupled with earlier concerns over European banks sent the greenback to one-week highs against the euro. A slight uptick in September US CPI data, a 0.1 percent rise versus a mean forecast of no change, helped push US Treasury yields up, supporting the greenback.
"To a large extent, the dollar is following US yields. The sharp drop in US yields last week was driven by fears of a slowing recovery and disinflationary pressures," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. "There weren't any big surprises in CPI, but the fact that it was a little firmer at the headline kind of helps nudge the market's expectations closer to the Fed's, even though the gap is still quite large," he said.
After the US data the euro's value eroded, hitting a fresh one-week low of $1.2635. It traded down 0.56 percent at $1.2643 in late New York activity. The dollar traded up 0.18 percent at 107.14 yen. Spanish news agency EFE, citing unnamed financial sources, said 11 euro zone banks were set to fail this weekend's long-awaited stress tests. That followed a Reuters report on Tuesday that the European Central Bank was looking at buying corporate bonds to boost euro liquidity.
The ECB, which will publish the test outcomes for 130 banks on Sunday, warned after the EFE report that final results had not yet been sent to the lenders involved, and it could not comment on individual institutions. Any inferences drawn would be "highly speculative," it said.
Several sources told Reuters on Tuesday the ECB was considering buying corporate bonds on the secondary market in an effort to boost the flailing euro zone economy, and could begin buying the bonds early next year. ECB Governing Council member Luc Coene told Belgian media there were no concrete plans for corporate bond purchases, but said this could be a way to prevent the bank from paying too much for just covered bonds and asset-backed securities.
The Canadian dollar gyrated wildly, firming to its session high of C$1.1191, or 89.35 US cents after the Bank of Canada left interest rates unchanged while dropping its reference to neutrality in its rate statement. But by the end of the day, the US dollar recouped its losses to trade at C$1.1240, a gain of 0.19 percent. Around the time of the announcement, at least one gunman entered Canada's Parliament building in Ottawa firing shots just outside a room where Prime Minister Stephen Harper was addressing legislators.
Sterling dropped 0.36 percent to $1.6052, up from the day's low of $1.6009. It was undermined by minutes from a Bank of England meeting showing the Monetary Policy Committee's nine members saw "few signs" of inflation pressures building. This indicated the drive toward tighter monetary policy was losing some steam. Just two members voted to raise interest rates, according to the minutes. "Calls for a rate hike early next year are diminishing, and if things continue as they are, it might not be long before we see the first hike priced in for early 2016 instead," said Alex Edwards, head of the corporate desk at UKForex.
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