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By Julien Ponthus and Sinéad Carew
LONDON/NEW YORK (Reuters) - The dollar index jumped sharply on Wednesday, with the euro hitting a 16-month low against the greenback, after U.S. consumer prices surged to their highest rate since 1990, fueling speculation that the Federal Reserve may raise interest rates sooner than expected.
The consumer price index rose 0.9% last month after gaining 0.4% in September and in the 12 months through October, the consumer price index accelerated 6.2%. the U.S. Labor Department said on Wednesday, while analysts expected on average the rise to be limited to 5.8%.
While the Fed last week restated its belief that the current inflation surge would be short-lived, many investors worry that underestimating price increases could prove to be a costly policy mistake.
At 1140 EDT (1640 GMT), the dollar index, which measures the greenback against six major currencies, was up 0.60% at 94.5230 after reaching a high of 94.609, just below its 13 and half-month high of 94.634 reached on Nov. 5.
While the Federal Reserve is already tapering its bond buying, rising inflation may force it to hike interest rates sooner than expected said Nancy Davis, founder of Quadratic Capital Management in Greenwich, Connecticut.
But "rate hikes might not be enough to reverse inflation because the sources of inflation involve supply chain bottlenecks and fiscal spending, which are two areas that the Federal Reserve doesn't control” she said.
“If inflation doesn't subside, the Federal Reserve may need to taper at a more substantial rate and hike interest rates, which could hurt stocks and bonds,” said Davis.
Against Japan's yen the greenback was last up 0.85% to 113.86 yen after touching a session high of 113.940. On Tuesday the dollar had hit a month-low against the yen.
Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York said the "pretty shocking" inflation data including sharp housing price increases suggest that high consumer prices are "not likely to prove transitory."
The euro was last down 0.61% at $1.1523 after earlier touching $1.15115, its lowest level since July 21, 2020.
Hammered last week after the Bank of England's surprise decision to keep rates unchanged, sterling was last down 0.59% at $1.3482, but still holding above Friday's more than one-month low of $1.3425.
The Australian dollar was down 0.24% against the greenback at $0.7363 after earlier hitting $0.7341, its lowest level since Oct. 13. The New Zealand dollar was down 0.55% against the U.S. dollar at $0.7091.
"What do these numbers say? Simply that inflation is going to be long-lasting and structural inflation has picked up speed," said Peter Cardillo, chief market economist at Spartan Capital Securities In New York.
"The bottom line is that this is going to be a real challenge for the Fed in the coming months and suggests that inflation has not peaked," he added.
Data had also shown on Tuesday that U.S. producer prices increased solidly in October, driven by surging costs for gasoline and motor vehicle retailing, suggesting that high inflation could persist.
In cryptocurrencies, bitcoin jumped to an all-time high of $69,000.00 after the U.S. inflation data and was last up 2.5% at $68,632.87.
Currency bid prices at 11:40AM (1640 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Dollar index 94.5230 93.9720 +0.60% 5.048% +94.6090 +93.9620
Euro/Dollar $1.1523 $1.1596 -0.61% -5.68% +$1.1595 +$1.1512
Dollar/Yen 113.8600 112.8800 +0.85% +10.18% +113.9400 +112.7800
Euro/Yen 131.21 130.87 +0.26% +3.38% +131.4100 +130.6600
Dollar/Swiss 0.9159 0.9112 +0.53% +3.54% +0.9168 +0.9110
Sterling/Dollar $1.3482 $1.3560 -0.59% -1.33% +$1.3565 +$1.3469
Dollar/Canadian 1.2439 1.2436 +0.03% -2.31% +1.2458 +1.2387
Aussie/Dollar $0.7363 $0.7380 -0.24% -4.30% +$0.7393 +$0.7341
Euro/Swiss 1.0553 1.0560 -0.07% -2.35% +1.0571 +1.0547
Euro/Sterling 0.8544 0.8551 -0.08% -4.40% +0.8560 +0.8532
NZ $0.7091 $0.7130 -0.55% -1.27% +$0.7132 +$0.7077
Dollar/Norway 8.5895 8.5025 +0.93% -0.06% +8.6000 +8.5215
Euro/Norway 9.8995 9.8640 +0.36% -5.43% +9.9080 +9.8519
Dollar/Sweden 8.6668 8.5735 +0.54% +5.74% +8.6705 +8.5738
Euro/Sweden 9.9875 9.9334 +0.54% -0.88% +9.9883 +9.9400
(Reporting by Sinéad Carew and Stephen Culp in New York, Julien Ponthus and Saikat Chatterjee in London; Kevin Buckland in Tokyo Editing by Emelia Sithole-Matarise, Alex Richardson and Alison Williams and David Gregorio)