LONDON (Reuters) – The dollar hit a one-year high against a basket of currencies on Thursday on growing expectations the U.S. Federal Reserve will tighten policy in coming months, and stock futures were indicating a stronger Wall Street open as the quarter ends.

FILE PHOTO: The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville

Fed Chair Jerome Powell said on Wednesday that resolving “tension” between high inflation and still-elevated unemployment is the most urgent issue facing the Federal Reserve right now, acknowledging the central bank’s two goals of stable prices and full employment are in potential conflict.

This mention of inflation helped the U.S. currency to end the quarter on a positive note.

“In the currency markets, there are expectations that the Fed will tighten, and the dollar is a safe asset,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

The dollar rose 0.15% to 94.489 against an index of currencies, heading for a gain of 2.3% on the quarter. The euro fell 0.23% to $1.1566, its lowest since July 2020 against the dollar. The dollar also hit its highest since Feb 2020 against the yen at 112.05.

In addition, “the ongoing U.S. debt ceiling stand-off could briefly amplify financial market jitters and support the USD in the short-term,” said analysts at CBA in a note.

U.S. lawmakers continue to wrangle over funding the government and face a Friday deadline to prevent a shutdown.

S&P futures gained 0.4% after the S&P 500 closed 0.16% higher, putting the index on track for a 1.4% rise on the quarter. But stocks have lost some of their exuberance of recent weeks on worries about supply shortages, rising prices and the pace of economic recovery.

The yield on benchmark 10-year Treasury notes was little changed at 1.5323%, having risen sharply earlier in the week.

World stocks were unchanged after several days of losses but were set to end the quarter down nearly 1%, after hitting record highs earlier this month.

European stocks rose 0.29%, with the UK’s FTSE up 0.22% and France’s CAC 40 flat.

Electricity prices in France are expected to rise around 12% by February, French environment minister Barbara Pompili said on Thursday, highlighting inflationary pressures sweeping across Europe.

French inflation hit a near 10-year high of 2.7% in September, official numbers showed, coming in slightly less than forecast. Italy’s annual inflation rate rose to 3.0%.

“This is not a broad-based inflationary spiral,” said Oxford Economics analysts in a note, though they added there was “little relief in sight for the record high energy prices in the coming months, with the severity of this winter a key factor”.

Germany’s 10-year government bond yield was little changed at -0.208%.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.24% after several days of losses, but was still set for a 4.5% monthly decline and a 9.3% loss on the quarter.

That would be the benchmark’s worst quarter since the first three months of 2020, as COVID-19 raged across Southeast Asia and investors worried about slowing global growth with China a particular concern.

China’s economy has been hit by regulatory curbs in the tech and property sectors and is now grappling with a power shortage.

Data published on Thursday showed China’s factory activity unexpectedly shrank in September, but services returned to expansion as COVID-19 outbreaks receded.

However, analysts say slowing growth would pressure authorities to ease policy. That provided battered Chinese markets with some respite, with blue chips rising 0.67%.

Shares in embattled developer China Evergrande, meanwhile, were down 3.9%.

The company missed paying bond interest due on Wednesday, two bondholders said, missing its second offshore debt payment in a week, although the cash-strapped company made a partial payment to some of its onshore investors.

The Nikkei lost 0.31% a day after Japan’s ruling party chose softly spoken consensus-builder Fumio Kishida as its new leader and the country’s new prime minister.

Oil prices fell amid rising U.S. crude oil inventories and the strong dollar.

Brent crude was down 0.36% at $78.44 a barrel while U.S. crude was down 0.15% to $74.72. [O/R]

Spot gold traded at $1,732 per ounce, hurt by the strong dollar and close to seven-week lows.

Additional reporting by Alun John in Hong Kong; editing by Elaine Hardcastle and Chizu Nomiyama

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