Dollar reverses losses, shows modest gain following 10-year

The dollar fluctuated but remained rangebound on Thursday as this week’s upward trajectory of U.S. Treasury yields took a breather.

While the dollar initially edged lower following the release of disappointing economic data, the greenback reversed its losses after benchmark Treasury yields partially recovered in the wake of a 10-year TIPS auction which showed soft foreign demand for the notes.

Against a basket of world currencies, the dollar was last up 0.13%.

U.S. 10-year note yields were at 1.8325%, off their two-year high of 1.902% reached on Wednesday.

“While yields are softer, they’re still at elevated levels, and the dollar continues to draw support ahead of next week’s Fed meeting,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “We’ve seen ebbs and flows this month, but the underlying fundamentals remain bullish for the dollar on the view that the Fed is going to adopt a more hawkish policy stance going forward.”

The benchmark yield’s advance has been driven by market expectations that the U.S. Federal reserve will tighten monetary policy at a faster pace than previously anticipated. Fed funds futures have fully priced in a rate hike in March and a total of four in 2022.

The central bank’s Federal Open Markets Committee (FOMC) is expected to convene its two-day monetary policy meeting on Tuesday, at the conclusion of which market participants will closely parse the committee’s statement regarding the tightening timeline.

“Currencies are sticking to the range, waiting on central banks next week,” Manimbo said, adding that “market expectations have arguably become overly aggressive with respect to hawkish Fed policy.”

The Euro was last at $1.1313, below an earlier high of $1.1369.

The pound was 0.03% higher at $1.3615 and the yen was nominally lower at 114.14 per dollar.

The Aussie firmed 0.41% to $0.7241, extending advances from the previous day, and the Canadian dollar reversed earlier gains, with one U.S. dollar worth C$1.2474.

The Norwegian crown fell after the central bank voted to keep interest rates on hold at 0.5% and said it was on track for an interest rate hike in March.

The crown was last down 0.16% against the dollar.

Among cryptocurrencies, bitcoin was most recently up 3.0% at $42,916, while smaller rival ether gained 4.3% to $3,215.

Dollar holds near weekly high, sterling rises after inflation data

The dollar held near a weekly high on Wednesday after a surge in U.S. yields resulted in sharp gains this week against the euro amid growing bets that the Federal Reserve will raise interest rates.

Sterling edged higher after data showed British inflation rose 5.4% in December, to its highest level in 30 years, raising rate hike expectations. Talks of a leadership challenge to Prime Minister Boris Johnson kept the pound in check.

The two-year gilt yield rose to 0.958% in early trade, its highest level since March 2018.

Ambrose Crofton, Global Market Strategist at JP Morgan Asset Management, said he expected the Bank of England to raise interest rates by 25 basis points in February.

“The strength of the labor market will give the Bank of England the confidence to continue to remove support for the economy as it looks to get a better handle on inflation,” he said.

In the meantime, the dollar has been boosted by U.S. Treasury yields rising further ahead of next week’s Federal Reserve policy meeting.

Ten-year Treasury yields inched up on Wednesday to touch a new two-year high of 1.9%.

Markets expect the Fed to raise interest rates amid a “stable” labor market and rising inflation, said Moritz Paysen, FX trader at Berenberg.

“It is not a question of if, but how quickly and strongly interest rates will be raised,” he said.

“At the same time, the impression is growing that the ECB (European Central Bank) continues to take its time to get a grip on inflation in the euro zone. This is another argument currently on the market that is helping the U.S. dollar to regain its strength,” he said.

The euro rose 0.1%, back on its 50-day moving average at $1.1340 after the previous day’s sharpest daily drop in a month.

The pound was up 0.25% at $1.3632. Against the euro , it rose 0.2% to 83.14 pence, its highest since February 2020.

The overall result was that the U.S. dollar index , which measures the greenback against six major peers, was 0.1% lower at 95.601.

Dollar heads for weekly loss as longs lose faith

The dollar headed for its largest weekly fall in eight months on Friday as investors trimmed long positions and deemed, for now, that several U.S. rate hikes this year are fully priced in.

In a week where data showed U.S. inflation at its hottest since the early 1980s, selling has forced the greenback through key support against the euro in particular and traders seem content to lighten their bets until a clearer trend emerges.

The dollar index is down about 0.9% for the week, on course for its largest weekly percentage fall since last May and set to halt a rally that has lasted about six months. The index last held at 94.849 in quiet Asia trade.

The euro is up more than 0.8% for the week so far, and has punched out of a range it held since late November. At $1.1457 it doesn’t face strong chart resistance until $1.1525.

The yen has rallied 1% over the week, and pushed back through 115 to the dollar, last holding at 114.13.

The moves have come while U.S. interest rate futures have all but locked in four hikes this year. But longer-end yields have fallen slightly on hawkish comments from Federal Reserve officials about reducing the bank’s balance sheet.

“Investors appear to be signaling that ending quantitative easing, hiking rates four times and commencing quantitative tightening all in the space of nine months is so aggressive that it will limit the scope for hikes further out,” said Derek Halpenny, head of global markets research at MUFG.

“It has in fact reinforced the belief that peak Fed funds will be below 2%,” Halpenny said in a note to clients.

“What can change this? We will need to see data on the economy that convinces the market of stronger growth. That could see thinking on the terminal fed funds rate shift higher. That would be the catalyst for renewed dollar strength.”

The Antipodean currencies have also been roused from their ranges and will have traders looking closely at labor and inflation data in both countries this month for anything that might prompt further shifts in central bank rhetoric.

The New Zealand dollar is up 1.3% for the week so far and is above its 50-day moving average at $0.6861. The Aussie briefly broke above stubborn resistance around $0.7276 this week, but retreated to that level on Friday.

“Further evidence of strength in the labor market will trigger expectations … for a potential positive shift in Reserve Bank of Australia rhetoric which will underpin the outlook for the AUD,” said Rabobank FX strategist Jane Foley.

“We expect AUD/USD to push higher to $0.74 in H2 2022.”

Sterling has been forging ahead, too, defying a political crisis threatening Prime Minister Boris Johnson’s position on confidence that Britain’s economy can withstand a wave of Covid-19 infections and that rate hikes could begin next month.

The pound traded above its 200-day moving average on Thursday and is heading for a fourth consecutive weekly gain of more than 0.5%. It last bought $1.3707.

In Asia on Friday the Bank of Korea raised its benchmark interest rate by 25 basis points to 1.25%, as expected, and the South Korean won looked to hang on to a weekly rise of about 0.8%.

China’s yuan, on the other hand, has had its gains on the dollar capped by growing expectations of policy easing to soften the landing of a slowing economy. Trade data is due around 0200 GMT.

Other notable moves in overnight trade included the Canadian dollar’s retreat from a two-month high as oil prices eased and a rise in the safe-haven Swiss franc to a ten-week peak of 0.9093 per dollar.

Dollar off lows as U.S. inflation test looms

The dollar steadied above almost two-month lows against its major peers on Wednesday, ahead of data expected to show a fresh surge in U.S inflation that could seal the case for an early rise in interest rates.

Federal Reserve Chair Jerome Powell on Tuesday gave no clear indication that the Fed was in a rush to speed up plans for tightening monetary policy, putting some downward pressure on the greenback which has benefited from U.S. rate-hike expectations in recent weeks.

And the currency started to nudge higher again as the December U.S. consumer price index (CPI), due out at 1330 GMT, loomed.

The dollar index was last trading at 95.643, steady on the day above the 95.533 low hit during the Asian session, the lowest since Nov. 18.

Headline U.S. CPI is forecast at a red-hot 7% on a year-on-year basis, which would be the highest annual CPI number since 1982.

ING currency strategist Francesco Pesole said since an inflation print above 7% is expected by markets, the immediate reaction in currency markets should be contained.

“At the same time, it should allow consolidation for a floor below the dollar in the near term – further cementing expectations for three Fed hikes and leaving the door open to speculate for four in 2022,” Pesole said.

“We think this is a reason for markets to keep buying the dips in the dollar for the time being.”

In a testimony at his renomination hearing on Tuesday, Fed chief Powell said the U.S. economy was ready for higher interest rates and a run-off of its asset holdings – dubbed quantitative tightening (QT) – to combat inflation.

But he said policymakers were still debating approaches to reducing the Fed’s balance sheet, and that it could sometimes take two, three or four meetings to make such decisions.

Money markets currently price about 85% odds of a rates lift-off by March, and a total of at least three quarter-point hikes by year-end.

April LaRusse, head of fixed income investment specialists at Insight Investment, noted that recent comments from businesses suggested they faced higher price pressures from raw materials and wages, for instance.

“So, it’s unlikely we get an undershoot in the inflation data… and if it’s as expected, there could be relief that it wasn’t higher,” she said.

The dollar was just 0.1% firmer at 115.40 yen, while the euro was steady at around $1.1364. A rise above $1.1387 would take the single currency to its highest since mid-November.

The Australian dollar, often considered a liquid proxy for risk appetite, pulled back from almost one-week highs at $0.72230 as the dollar regained its footing.

But the greenback was stuck at two-month lows against the Canadian dollar at 1.25345.

And sterling was steady having risen to $1.3645 for the first time since Nov. 4, bolstered by a view that the worst of the Omicron COVID surge maybe be passing in Britain – helping pave the way for another near-term rise in UK interest rates.

Dollar stagnates as traders wait on Fed Chair Powell for policy hints

The U.S. dollar hovered near the middle of its recent range against major peers on Tuesday as traders looked to incumbent Fed Chair Jerome Powell’s nomination hearing later in the day for new clues on the timing and pace of policy normalization.

In his prepared opening remarks, released Monday, Powell will pledge to prevent high inflation from becoming “entrenched,” but will make no mention of plans for the path of monetary policy.

However, he will take questions from senators in his bid for a second four-year term.

The dollar index, which measures the currency against six counterparts, hovered around 95.93 early in the Asian session.

It hit a more than 16-month high of 96.938 on Nov. 24 amid increasing hawkishness from Fed policy makers, but has since been stuck between that level and 95.544, touched less than a week later, despite a continued ramping up of rhetoric that now has Wall Street banks forecasting four quarter-point rate hikes this year.

TD Securities strategists said it seemed the Fed was of the mindset of “sooner rather than later” for both higher rates and running off its balance sheet after ending bond-buying stimulus – a process dubbed quantitative tightening (QT).

“An affirmation of March tightening and early QT should support USD firmness overall, though within well-established ranges,” they wrote in a research note.

TD expects a first hike in June, but as early as March was also a possibility.

Money markets are priced for an increase by May, with two more by November.

U.S. December consumer inflation data is due to be released on Wednesday, with headline CPI seen coming in at a red-hot 7% on a year-on-year basis, boosting the case for an early increase in interest rates.

The dollar was little changed at 115.23 yen after bouncing off a one-week low of 115.045 overnight.

The euro was about flat at $1.13325, stuck in the middle of its trading range since mid-November.

Sterling was stable at $1.35825 after easing back from Monday’s two-month high of $1.36025.

The Australian dollar added 0.17% to $0.71860, getting support from local retail sales data that came in much higher than economists forecast.

Dollar extends gains versus yen as investors bet on Fed rate hikes

The U.S. dollar extended gains against Japan’s yen on Tuesday, hitting new five-year highs as investors bet that the fast-spreading Omicron coronavirus variant would have limited economic impact and that the Federal Reserve would hike rates.

In the second trading day of 2022, global markets extended the upbeat moves seen on Monday.

The dollar’s gains were helped by a rise in U.S. treasury yields, with the U.S. 10-year yield hitting a six-week high.

At 1158 GMT, the dollar index was up 0.2% at 96.398, its highest in 13 days .

Versus the yen, the dollar was up 0.7% at 116.125, extending its overnight gains to reach its highest since January 2017. But it was only the biggest daily gain for the dollar versus the yen since November 2021.

The euro was down 0.2% versus the dollar, at $1.1276 .

Investors see Omicron as potentially less disruptive to the global economy than previous variants, following studies suggesting that the risk of hospitalization is lower.

Money markets have fully priced in a first U.S. rate increase by May, and two more by the end of 2022.

“As long as inflation keeps going up there is scope for the dollar to remain firm,” said Colin Asher, senior economist at Mizuho.

Asher said it could be hard for the dollar to build much further on current strength given so much policy tightening is already priced in “but given the short term momentum, in Q1 we are likely to see the dollar remain pretty firm, especially as we are seeing a very rapid change in asset purchases.

“U.S. inflation may peak in January but the market will take a bit of time to acknowledge that.”
Inflation focus

Asia’s factory activity grew in December as companies withstood rising global cases of the Omicron variant, though persistent supply constraints and rising input costs clouded the outlook for some economies.

“As Omicron is not translating to severe infection and death, the initial risk-off shock has been completely erased and markets are focused on the supply chain impact and inflationary narrative,” Elsa Lignos, global head of FX strategy at RBC Capital Markets, said in a note to clients.

Risk-sensitive currencies were generally up on the day. The Australian dollar, which is seen as a liquid proxy for risk appetite, was up 0.1% at $0.71975, even as hospitalization in the state of New South Wales surpassed the record levels seen during the Delta variant outbreak.

The New Zealand dollar was down 0.2%.

Britain’s pound was up 0.1% at $1.349, while euro-sterling edged down to its lowest since February 2020, 83.57 pence per euro, shortly before midday .

British Prime Minister Boris Johnson said on Monday that the country would “continue with the path that we are on” in terms of measures to limit the COVID-19 spread.

Bitcoin was up 0.5% on the day at $46,651.17, still significantly below its latest all-time high of $69,000 reached in November.

China has released pilot versions of its digital yuan wallet application, the “e-CNY (Pilot Version)” app, as the country’s central bank steps up its push to develop its own digital currency.

Dollar hits five-year high vs yen as Fed rate bets lift U.S. yields

The U.S. dollar reached its strongest level in nearly five years against the Japanese yen on Tuesday, lifted by a jump in Treasury yields as traders bet on an early Federal Reserve interest rate hike despite surging COVID-19 cases.

The greenback rose as high as 115.815 yen for the first time since Jan. 11, 2017, as long-term Treasury yields leapt 12.5 basis points overnight to touch 1.6420% for the first time since Nov. 24.

Money markets have fully priced in a first U.S. rate increase by May, and two more by the end of 2022.

The dollar index, which measures the currency against the yen and five other major peers, held close to the one-week high of 96.328 reached on Monday.

“The market is pricing in a more aggressive U.S. rate hike scenario – or at least the risk thereof – in 2022, and that definitely remains the key support for the dollar,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo.

“The key question for this year is where does inflation go, where does it peak?”

The euro traded at $1.1302, lifting off the one-week low of $1.12795 from overnight.

Sterling slipped to $1.34685, falling back toward the overnight trough of $1.3431, a level not seen since Nov. 29.

The Australian dollar hovered close to a near two-week low of $0.7184 reached in the previous session.

While the surge in coronavirus cases caused by the Omicron variant continued to impact global travel and public services, and delay the reopening of some U.S. schools after the holidays, investors remained optimistic that lockdowns would be averted.

On Monday, the U.S. Food and Drug Administration authorized the use of a third dose of the Pfizer and BioNTech COVID-19 vaccine for children aged between 12 and 15 years, and narrowed the time for all booster shots to five months from six months after primary doses.

Signs that Omicron is highly contagious but leads to less severe illness than variants such as Delta have led to an “Omicron relief trade” buoying stocks and bond yields that could dominate market sentiment through January, OANDA analyst Jeffrey Halley wrote in a note.

For dollar-yen, “assuming that U.S. yields remain elevated, there is nothing on the charts to stop a rally to 118.00 in the coming weeks,” he said.