Dollar Further Up as Treasury Yields Resume Rise

Dollar Further Up as Treasury Yields Resume Rise

In early London trading, the dollar index held at around 91.84 Monday. It touched a late November 2020 high of 92.51 last week.

This week before a Federal Reserve meeting, rising bond yields will continue to dominate investors’ minds. Some analysts expect policymakers to strike an optimistic tone on the U.S. economy at the meeting.

Expectations are low that the Fed will announce major policy changes at its second meeting of the year. However, it is likely to raise its estimates of 2021 growth and inflation. That is while making its first quarterly economic forecasts of the year.

On Wednesday’s meeting, Fed’s Jay Powell will be faced with a truck-load of inflation questions. And if he keeps referring to inflation being allowed to ‘moderately overshoot’, then they should expect long bond yields to continue up. That is since inflation expectations will likely follow, said analysts at Nordea, in a research note.

The Bank of Japan (BOJ) and the Bank of England (BOE) are set to hold policy meetings later in the week.

On Monday, the dollar gained for a second consecutive session. Rising U.S. Treasury yields forced forex traders to cut their bearish dollar bets to four-month lows.

On the same day, Benchmark 10-year Treasury yields were trading at 1.6320%, close to Friday’s top of 1.6420%. This was a level last seen in February. 

The rising U.S. yields have lifted the USD in recent weeks. That was due to the widening interest rate differentials relative to other major bond markets.

SEB analysts said in a note that the Fed is not expected to tinker with its monetary policy. Instead, communicate via forecasts that the situation is under control. Moreover, that markets are running way ahead of themselves, they added in the note.

In February, U.S. producer prices increased strongly. This led to the largest annual gain in nearly 2-1/2 years. That was with the country’s economy set for a massive $1.9 trillion stimulus package.

Currencies Movements

The safe-haven dollar added 0.2% against the Japanese yen to 109.22, climbing to its highest since June 2020.

The euro sank 0.2% to $1.1925.  This followed last week’s rise for the first time in three weeks as hedge funds slashed their net euro positions.

The “Aussie” lost 0.3% to $0.7732, extending Friday’s 0.4% loss.

The greenback has been buoyed by a paring of bets for its decline. Since mid-November, speculators have cut net short positions to the lowest in the week ended March 9.

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