* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Recasts, updates dateline, adds analyst quotes)
By Kate Duguid
NEW YORK, Oct 26 (Reuters) - The U.S. dollar rose to a two-month high of 96.860 against a basket of major currencies in morning trading on Friday after U.S. headline third-quarter gross domestic product data exceeded estimates.
The U.S. economy slowed less than expected in the third quarter as the strongest consumer spending in nearly four years and a surge in inventory investment offset a tariff-related drop in soybean exports. GDP increased at a 3.5 percent annualized rate, the Commerce Department said on Friday in its first estimate.
U.S. President Donald Trump’s protectionist policies took 1.8 percent off of the GDP figure, said Greg Anderson, global head of FX strategy at BMO Capital Markets.
The exchange of tariffs between the United States and China has lifted the value of the dollar, which serves as a safe-haven in times of volatility and geopolitical turmoil. The market has also assumed that while the U.S. economy will be hit by reduced trade, it will be hurt less than its trading partners, which also boosts the dollar.
Yet while the strong currency benefits U.S. assets, it also raises the cost of imports and exports, which hurts growth. The net effect tends to be neutral.
“Unless you are willing and able to push down your currency at the same time that you’re erecting your tariffs, the currency move is going to offset the tariffs,” Anderson said.
The GDP report also showed the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, missed expectations after it increased 1.6 percent in the third quarter. The core PCE price index rose at a 2.1 percent pace in the April-June period.
Soft inflation also helped strengthen the dollar. And despite the strong headline growth, it may give the Federal Reserve a reason to pause its rate-hiking cycle at the Federal Open Markets Committee meeting in December, said Anderson.
A recent downturn in stocks and worries about corporate earnings growth has prompted forex investors to buy the Japanese yen and the Swiss franc, two currencies typically seen as safe havens during downturns.
Against the dollar, the yen was at its strongest since Sept. 13, up 0.61 percent on the day, last at 111.68. The franc was up modestly, last at $1.00, after retracing some gains made earlier in the day.
The euro, meanwhile, fell to a 10-week low of $1.133. It hit a two-month low of $1.135 the previous session, following European Central Bank President Mario Draghi’s failure to convince traders the ECB could pursue monetary tightening after next summer as political and economic uncertainties grow in the monetary union. (Reporting by Kate Duguid and Tom Finn; Editing by Bernadette Baum)