Euro falls after inflation data but heads for weekly gain



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Dollar rebounds but heads for weekly loss

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FX markets calmer but analysts doubt it will last

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Euro zone inflation comes in at punchy 10% for September

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Talk of yuan intervention aids Chinese currency

LONDON, Sept 30 (Reuters) - The euro dropped on Friday after inflation in the euro zone hit a record high, but headed for a weekly gain on hawkish signals from the European Central Bank as some calm returned to foreign exchange markets at the end of a wild week.

Sterling was also lower as end-of-quarter demand boosted the dollar, but was headed for its best week against the U.S. currency in 2 1/2 years as the BoE waded into the debt market to buy gilts for a second day on Thursday. On Monday, the pound hit a record low as markets were rattled by the British government's plan to slash taxes and pay for it with more borrowing.

Data on Friday showed euro zone inflation zoomed past forecasts to hit 10.0% in September, a new record high that will reinforce expectations for another jumbo rate hike next month from the ECB. After several days of gains, traders took profit on the euro.

By 1055 GMT, the euro traded at $0.9761, down 0.6% EUR=EBS , while the dollar index =USD roared 0.5% higher but is on course for a weekly loss.

The pound touched $1.1235 GBP=D3 , erasing all of its precipitous losses in the aftermath of the new government's so-called mini budget last Friday. It was last at $1.1066, down 0.5%.

Foreign exchange volatility has surged this week as investors worry about the pace of global monetary tightening and the UK mini-budget fallout, and while nerves calmed on Friday, few analysts think it is over.

"As cross-market volatility pushes up to new highs for the year, credit spreads widen and the market reflects on a near-miss with a financial crisis in the UK pension fund industry, it is probably time to take even more defensive positions in FX," ING strategists said.

In a sign of the rush for the safety of the dollar, demand for the U.S. currency in derivative markets surged on Friday to its highest since the COVID-19 crisis in 2020.

So far this year, the dollar has soared 17% against rivals, including a 7.2% gain in the current quarter.

"We have seen some dollar selling into the latter portion of this week – but it feels like nothing more than some profit taking before another run to the top side, rather than any sign that the USD is actually topping out," said Joel Kruger, market strategist at LMAX.

Elsewhere, China's yuan on Friday briefly recouped all of its losses from earlier in the week after Reuters reported the central bank had told major state-owned banks to be ready to support the currency in offshore trading CNH=EBS .

The Swiss franc fell after the Swiss National Bank said it had intervened in the foreign exchange market in the second-quarter to support the currency. The dollar CHF=EBS rose 0.4% versus the franc and the euro EURCHF=EBS was unchanged.

The dollar was unmoved against the yen at 144.47 JPY=EBS , and has been mostly tracking sideways below the psychological 145 line since Japanese officials stepped in to conduct their first yen buying intervention since 1998 last week.



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Reporting by Tommy Reggiori Wilkes
Additional reporting by Kevin Buckland in Tokyo
Editing by Robert Birsel and Chizu Nomiyama

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