Dollar hits three-month high to euro on bets for faster Fed tightening

© Reuters. FILE PHOTO: Rolled Euro banknotes are placed on U.S. Dollar banknotes in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

By Kevin Buckland

TOKYO (Reuters) - The U.S. dollar touched a three-month high versus the euro and a one-week high versus the yen on Wednesday, after heated U.S. inflation spurred bets of faster monetary policy tightening than Federal Reserve officials have so far signalled.

The dollar strengthened to $1.17720 per euro, the highest since April 5, for a second day running on Wednesday, and was last little changed from Tuesday at $1.17755.

It rose to 110.70 yen for the first time since July 7, last trading about flat at 110.66.

The greenback also remained just shy of the $0.6918 mark against the New Zealand dollar, reached on Tuesday for the first time since November. It last traded largely unchanged at $0.6956 ahead of a policy update by the Reserve Bank of New Zealand, with economists largely expecting no changes.

"Another hotter-than-expected U.S. CPI print has got the market wondering whether the lift in inflation will prove to be transitory or more enduring," Tapas Strickland, an analyst at National Australia Bank (OTC:NABZY), wrote in a research note.

"Markets have sided on the hawkish interpretation, bringing forward rate hike expectations to late 2022," leading to "broad-based gains" for the dollar, the note said.

The dollar index, which measures the U.S. currency against a basket of six peers, was little changed at 92.783 after earlier rising as high as 92.832 -- just below the 92.844 level reached last week for the first time since April 5.

U.S. consumer prices rose by the most in 13 years in June amid supply constraints and a continued rebound in the costs of travel-related services from pandemic-depressed levels as the economic recovery gathered momentum.

Traders are now looking ahead to Fed Chair Jerome Powell testifying before Congress on Wednesday and Thursday for any signals on the timing of a tapering of stimulus and higher interest rates. Powell has repeatedly stated that higher inflation will be transitory, noting that he expected supply chains to normalise and adapt.

Elsewhere, the Canadian dollar held its biggest decline in a week to trade at C$1.25155 per greenback, weakening toward a 2-1/2-month low of C$1.2590 reached last week.

The Canadian central bank is due to update its economic forecasts at a policy announcement later on Wednesday, with further tapering of asset purchases expected.