Dollar Up, Yields Rise on Inflation Concerns

Dollar Up, Yields Rise on Inflation Concerns

The dollar edged higher in early European forex trading on Wednesday, after a surge in U.S. bond yields. This was on the prospects of a prompt economic recovery as well as a possible acceleration in inflation.

The U.S. Dollar Index was up 0.3% at 3:55 AM ET (0755 GMT) at 90.757. It bounced from the three-week low of 90.117 hit on Tuesday. 

EUR/USD dropped 0.3% to 1.2074 and USD/JPY was unchanged at 106.06 after hitting a five-month high earlier. The risk-sensitive AUD/USD dipped 0.1% to 0.7746.

On late Tuesday, Benchmark 10-year Treasury yields made a fresh one-year high.  It rose as high as 1.333% from around 1.20% at the end of last week. Moreover, the prospect of better risk-free returns helped the U.S dollar. 

The likely path of inflation levels going forward is the center of discussion. The Biden administration is likely getting its way and an additional $1.9 trillion of stimulus that’s largely funded by borrowing.

In nearly three years, the gap between ten-year and two-year U.S. yields also widened to the largest level. This is suggesting investors don’t expect the Federal Reserve to lift interest rates in the short-term. But if inflation climbs above the 2% level, for how long will they be prepared to stay accommodative?

The minutes on Wednesday from the U.S Federal Reserve’s January meeting will be closely watched. Investors will watch out for clues as to when the central bank will move.

Currencies Movements

GBP/USD fell 0.2% to 1.3878, weighed by the support for the dollar. This was even as U.K. inflation accelerated in January. 

Consumer prices increased 0.7% from a year earlier, slightly up from 0.6% in December. This was according to the Office for National Statistics on Wednesday.

It leaves inflation well below the 2% level targeted by the Bank of England. The BoE has cut interest rates and expanded its bond-buying program in response to the economic damage caused by pandemic.

Meanwhile, the NZD/USD pair fell 0.19% to 0.7199. The USD/CNY pair was flat at 6.4582. After rising to two-and-a-half year highs on Tuesday, the offshore yuan retreated.

In cryptocurrency news, Bitcoin held firm after breaking past the $50,000 mark for the first time on Tuesday. Investors were betting on a more widespread acceptance of the cryptocurrency among major companies.