Key facts
- The dollar declined on Thursday as euro zone bond yields cooled.
- Euro zone government bond yields rose sharply due to surging oil prices and inflation concerns.
- Investors sold bonds of heavily indebted countries like France and Italy.
- The euro recovered from earlier lows as yields retreated.
- US Federal Reserve Governor Christopher Waller suggested flexibility in the pace of future rate hikes.
- Markets are pricing in an 87.9% chance of a Fed rate hike in December.
The dollar declined on Thursday as euro zone bond yields retreated from recent highs, while expectations for the Federal Reserve's interest rate path remained largely intact. Surging oil prices and intensified inflation concerns had previously driven euro zone government bond yields sharply higher, prompting investors to sell bonds of heavily indebted countries such as France and Italy.
The euro recovered from its earlier lows as yields retreated. The French 10-year yield was little changed at 4.8735% after climbing as high as 4.9685% earlier in the day. France has been particularly affected as investors scrutinize its debt load, budget deficit, and political outlook ahead of the 2027 presidential election.
In Spain, trade unions announced a nationwide general strike for November 11 over housing issues, which will occur shortly before a snap election.
Meanwhile, expectations for a rate hike from the Fed at its upcoming October policy meeting remain subdued. Minutes from the central bank's most recent meeting showed policymakers viewed inflation as the biggest risk to their outlook, and analysts found no surprises. US Federal Reserve Governor Christopher Waller said on Thursday that additional rate hikes would likely be needed to lower inflation to the Fed's 2% target, but he also noted "flexibility" regarding the pace of increases and left open the possibility of a pause at the Fed's upcoming October meeting. These comments echoed previous signals from Fed officials favoring patience.
Markets are pricing in only a 19.4% chance for a Fed hike of at least 25 basis points at the October meeting, down slightly from 24.4% a week ago, according to CME Fedwatch. However, investors are pricing in an 87.9% chance for a hike at the central bank's December meeting.
On the economic front, the US Labor Department reported that weekly initial jobless claims dipped by 2,000 to 197,000, slightly below the 200,000 estimate, indicating continued stability in the job market.
Euro zone inflation could rise higher than projected, but European Central Bank policymakers dampened near-term rate hike bets, with several officials arguing on Thursday that underlying trends suggest a more benign picture. The widening yield gap between German bonds and those of more indebted euro zone countries has contributed to the euro reaching its lowest level since May of the previous year.
Sterling strengthened 0.18% to $1.3234 after Bank of England Governor Andrew Bailey stated that governments must increase efforts to demonstrate their ability to repair public finances, as bond markets globally feel the strain of high borrowing levels and rising inflation pressures. Against the Japanese yen, the dollar weakened 0.01% to 158.06.