Expectations of Prolonged High-Interest Rates Boost Dollar
The U.S. dollar is on the brink of marking its fifth successive week of gains against major peers. This way, the currency achieved its longest winning streak in 15 months. The surge is driven by market expectations of prolonged high U.S. interest rates and a flight to safer assets due to apprehensions about China’s economic performance.
Concerns Persist About Possible Japanese Intervention
Although the dollar slightly scaled back its gains on Friday, particularly against the yen, concerns of possible intervention by Japan’s authorities remain prevalent.
China’s Yuan Decline Draws Attention
A hastening decline in China’s yuan has also grabbed the attention of Beijing, prompting the People’s Bank of China to establish a much stronger-than-expected daily fixing. This move provided the yuan with some early support, given that it had reached a 9-month low the day before.
Dollar Index Movement
In the Asian session, the U.S. dollar index, which measures the currency against major developed-market counterparts, eased by 0.02% to 103.38 after reaching a two-month peak of 103.59 overnight. Over the week, it is anticipated to gain 0.5%.
Fed’s Perspective and Robust Economic Data
Minutes from the Federal Reserve’s recent meeting unveiled that most members of the rate-setting committee perceive “significant upside risks to inflation,” indicating a leaning towards further rate hikes. Strong economic data, particularly robust retail sales figures, have already fortified the argument for more tightening.
Impact on Treasury Yields
These factors propelled the 10-year Treasury yields to their highest point since October, reaching 4.328% on Thursday.
Market Analyst’s View
“Market sentiment desires the Fed to pause, but the data contradicts that,” remarked Tony Sycamore, a markets analyst at IG. Sycamore added that a pause for profit-taking on the dollar’s rally makes sense before the weekend. Still, a move above 103.70 for the index in the coming week seems plausible, potentially opening the door to testing the May peak at 104.70 and then 105.88.
Currency Movements
Against the yen, the dollar experienced a 0.32% dip to 145.365 on Friday, having previously reached a nine-month high of 146.40. The euro saw a marginal 0.06% uptick to $1.0878, rebounding from Thursday’s six-week low of $1.08565.
Australian Dollar’s Performance
The Australian dollar, often regarded as a proxy for China’s economic performance, surrendered its early gains, slipping 0.05% to $0.6399.
Bitcoin’s Drop and Market Response
Amid these developments, the world’s largest cryptocurrency, bitcoin, plummeted to a fresh two-month low at $26,172 on Friday, following a drop of over 7% in the previous session. “There’s a point where it couldn’t ignore the surge in U.S. Treasury yields any longer,” noted IG’s Sycamore, who contemplates the potential for bitcoin to decline to $24,500. “The question arises whether you’d want your assets in a speculative sector when you’re in the midst of a bond market upheaval.”
