By Samuel Indyk and Gregor Stuart Hunter
LONDON, Oct 8 (Reuters) - The dollar edged towards its strongest level in 18 months on Thursday, after minutes from the US Federal Reserve signalled policymakers viewed inflation as the biggest risk to their outlook, while higher oil prices and rising euro zone bond yields have weighed on the euro.
The global bond selloff has been the dominant driver in currency markets in recent weeks, with yields rising again on Thursday as oil prices jumped.
The widening gap
in yields between German bonds and those of more indebted countries in the euro zone, such as France and Italy, has pushed the euro to its lowest level since May last year.
French government bonds have come under particular selling pressure due to worries about its deteriorating fiscal situation ahead of next year's presidential election.
"If you look at euro-dollar, it's not only about dollar strength but euro weakness coming from the political situation in France," said Tommy von Brömsen, FX strategist at Handelsbanken.
The euro was down slightly on Thursday at $1.1191, close to its lowest level in 17 months, as the spread between German and French 10-year yields, a market gauge of risk premium attached to France, widened by 4 basis points.
The dollar index, which measures its strength against a basket of six currencies, including the euro, was up 0.1% at 102.32 after rising 0.3% on Wednesday. The US currency remains within a few pips of its strongest levels since April 9, 2025, following the market turmoil that accompanied US President Donald Trump's so-called Liberation Day tariff announcement the previous week.
FED MINUTES
Fed policymakers voted unanimously to raise interest rates by a quarter of a percentage point at the US central bank's September 15-16 meeting. The minutes from that meeting released on Wednesday indicated that policy might need to be tightened further.
"There was no major surprise, but I think they were on the hawkish side," said Handelsbanken's von Brömsen.
The minutes did little to shift expectations that the Fed would stand pat at its meeting later this month. Fed funds futures are pricing an implied 80% probability the US central bank will keep rates on hold at its next two-day meeting ending October 28, while a hike in December is fully priced in.
Against the yen, the US dollar was up 0.1% at 158.22, reversing a short-lived dip after data released on Thursday showed Japan's current account surplus stood at 4.062 trillion yen ($25.7 billion) in August, higher than economists' median forecast for a surplus of 3.19 trillion yen.
The Australian dollar was down 0.1% at $0.6953, while its kiwi counterpart was down 0.1% at $0.5592.
Against the Chinese yuan, the US dollar was flat at 6.7030 in offshore trade.
(Reporting by Samuel Indyk and Gregor Stuart Hunter; Editing by Lincoln Feast, Jamie Freed and Alex Richardson)
