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Dollar Rises on Higher Yields; Sterling Gets Budget Boost

Published 03/04/2021, 04:06 PM
Updated 03/04/2021, 04:07 PM
© Reuters.
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By Peter Nurse

Investing.com - The dollar traded higher in early European trading Thursday, helped by rising U.S. Treasury yields, while traders look to a speech by Federal Reserve Chairman Jerome Powell later for guidance.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 91.002, adding to Wednesday’s gain of around 0.3%.

EUR/USD fell 0.1% to 1.2058, USD/JPY was up 0.1% at 107.13, after hitting a seven month high the previous session. However, commodity currencies were still well-bid: the risk-sensitive AUD/USD rose 0.5% to 0.7812, continuing to show strength after Wednesday’s strong GDP data. The kiwi and Canadian dollar also rose.

The yield on benchmark 10-year U.S. Treasuries traded around 1.49% overnight, heading back towards a one-year high of 1.61% set last week on bets that a strong economic recovery aided by government stimulus will result in revived inflation, prodding the Federal Reserve into early tightening action.

This brings Fed chief Jerome Powell firmly into focus, as he is due to speak at a conference at 12:05 PM EST (1705 GMT), in what will be his last outing before the Fed's policy-making committee convenes mid-March.

Many Fed officials have downplayed the rise in Treasury yields in recent days, although Fed Governor Lael Brainard on Tuesday acknowledged that the rapid rise in yields had “caught her eye.”

“Comments that he’s monitoring events in the Treasury market might be enough to calm things down, encourage a return to high yield FX and a softer dollar,” said ING analysts, in a research note. “No such concern from Powell would suggest that the Fed is happy for U.S. Treasury yields to ‘find the right level’ – as our bond strategy colleagues would say – potentially triggering another spike in U.S. yields and more dollar short-covering.”

The over rise in Treasury yields came despite Wednesday’s data showing the U.S. labor market struggled in February, when private payrolls rose less than expected. However, the weekly initial claims numbers will also be studied carefully, ahead of Friday’s official payrolls release.

The issue of higher yields was not solely a factor in the United States, with the 10-year U.K. Gilt yield climbing to 0.78%, near its 11-month high of 0.836% hit last week, after the government unveiled much higher borrowing. 

It has since slipped back to 0.775%, but sterling remains supported, with GBP/USD trading 0.1% higher at 1.3956.

“Yesterday’s U.K. budget was seen to strike the right balance and support the spring recovery.  Gilts sold off on the larger than expected supply plans, yet we think the re-assessment of UK growth prospects can support GBP,” ING added.

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