U.S. dollar index falls as currency volatility picks up

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A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

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  • U.S. dollar index down 0.2%
  • U.S. dollar down 0.6% against Canadian dollar
  • Canadian dollar appreciates to $1.2320
  • Aussie up after jumping on inflation data

NEW YORK, Oct 27 (Reuters) - The U.S. dollar lost value against major currencies on Wednesday as the Bank of Canada started off a series of awaited central bank policy comments that could bring more volatility to what had been a relatively steady market.

The moves took the U.S. dollar index down 0.2% to 93.73 and as the dollar weakened against the Canadian dollar, euro and Japanese yen.

The greenback lost 0.6% to the Canadian dollar after the Bank of Canada signaled that it could hike interest rates sooner than it had thought. The loonie traded at $1.2320 in early afternoon in New York. read more

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Before the announcement, which was viewed by some as surprisingly hawkish, the Canadian dollar had weakened to its lowest level in nearly two weeks against its U.S. counterpart.

"You're going to see more FX volatility and swings here," said Ed Moya, senior market analyst at broker OANDA.

Traders will have different expectations for inflation in each region, Moya said, adding: "Interest rate differentials are going to be really hard to calculate for some currencies."

The Bank of Canada comments could be the first trigger for new assessments of how interest rates will change and impact currencies as central bankers try to support the pandemic recovery without unleashing sustained inflation.

Currency markets had moved little in the first two days of this week as traders paused for monetary policy announcements from major central banks around the world, including the U.S. Federal Reserve, which meets next week. read more

For much of the day, the euro traded within 0.2% of its Tuesday close against the dollar . The euro was last up about 0.1% to $1.1614.

The European Central Bank meets on Thursday and is expected to take a dovish stance.

The German government cut its 2021 growth forecast for this year, as supply bottlenecks for semiconductors and rising energy costs delay recovery in Europe's largest economy. read more

Germany's 10-year bond yield fell to its lowest in more than a week and its yield curve flattened.

Similarly, the U.S. yield curve flattened with the spread between yields on two- and 10-year Treasuries narrowing to fewer than 104 basis points, the least since August. The 10-year yield dipped below 1.53%. It had reached 1.70% last week.

Flattening yield curves in developed markets this week may reflect concern, analysts say, that central banks will err if they tighten policy too early in the face of higher inflation that proves temporary.

The Australian dollar rose about 0.4% to $0.7534 after data showed that Australian core inflation sped to a six-year high in September, surprising the market. The data prompted a spike in short-term yields. read more

The Reserve Bank of Australia meets on Tuesday of next week and market pricing is at odds with RBA policymakers' insistence that there will be no rate hikes before 2024.

Against Japan's yen, the U.S. dollar was down 0.4% to 113.69 - still within recent ranges and close to the four-year high of 114.695 the dollar touched against the yen one week ago .

The Bank of Japan meets on Thursday and is widely expected to downgrade its economic assessment. Markets have been betting on no rate hike in the foreseeable future. read more

The British pound was down less than 0.1% to $1.3756 after the U.K. finance minister unveiled Britain's budget forecasts. . read more

In cryptocurrencies, bitcoin fell to as low as $58,100 - its lowest in a week and a half - in a move attributed to profit-taking following the all-time high of $67,016 it reached last week. Since that high, the cryptocurrency has fallen more than 13% but was on track for its best month since February. read more



Currency bid prices at 1:16PM (1716 GMT)

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Reporting by David Henry in New York and Elizabeth Howcroft in London; Editing by Christina Fincher, Barbara Lewis, William Maclean and Marguerita Choy

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