LONDON: The euro rebounded on Thursday away from 16-month lows versus the dollar as traders assessed whether the U.S. currency's recent surge - fuelled by differing expectations for interest rate rises - had gone too far.
Markets have been betting that the European Central Bank will fall behind in tightening policy even as rising inflation prompts others including the Federal Reserve to raise rates over the next 12 months.
Stronger-than-anticipated inflation numbers in the United States last month, as well as punchy retail sales data this week, have reinforced those bets.
The euro, which on Wednesday touched a 16-month low below $1.13, rose 0.2% to $1.1345 in European trading hours on Thursday.
The dollar index, which measures the currency against a basket of six rivals, reached its highest since mid-July 2020 on Wednesday at 96.226, but was last down 0.2% at 95.654.
"Our core view is that the dollar can continue its rally against the low yielders, but that these mid-cycle dollar gains should not stand in the way of some strong performance in the commodity FX space," ING analysts said in a note.
Other analysts said the dollar's robustness was not necessarily durable.
"The sustainability of the current dollar strength beyond the next few months looks far from certain," said Luc Luyet, FX strategist at Pictet Wealth Management.
Euro crumbles; traders wait on US consumer test
"Market expectations of the Fed are starting to be particularly hawkish, suggesting limited tailwinds for the U.S. dollar going forward from that factor."
The New Zealand dollar jumped 0.7% to $0.7049 after a central bank survey showed near-term inflation is expected to rise in the fourth quarter.
The day before, sterling rose 0.5% to a one-week high against the dollar after a rise in Britain's October inflation piled pressure on the Bank of England to hike rates at its meeting next month.
The British currency was last at $1.3493, unchanged on the day.
Elsewhere, Turkey's lira shed another 2.3% and headed towards 11 per dollar after the central bank cut rates by 100 basis points to 15%, even in the face of inflation near 20% and the Turkish currency hurtling southwards.
The lira has lost 11.5% of its value so far this month amid President Tayyip Erdogan's renewed criticism of interest rates and calls for stimulus despite the risks. It was last at 10.85, having hit a record low of 10.98 per dollar overnight.
Commodity-linked currencies were hurt by oil prices, which slumped to near six-week lows.
The Canadian dollar was at a six-week low. Markets are expecting the Bank of Canada to start raising interest rates early next year. The Norwegian Crown also fell.
The Australian dollar touched a six-week low of $0.7263 but later bounced back, aided by the Kiwi's rally and was last up 0.3% at $0.7290.