Dollar edges up while U.S. yields poke above 3 percent to four-year highs

On Wednesday the dollar inched up, approaching its recent four-month high as the U.S. 10-year bond yield poked above 3 percent to hit its highest level since early 2014.

The measure of the greenback’s strength against a basket of six major currencies (DXY), which is dollar index rose 0.1 percent to 90.844. It had climbed overnight to 91.016, highest since Jan. 12, before a slide in Wall Street stocks tempered investor risk appetite and slowed the greenback’s rally against its peers, notably the yen.

As U.S.-China trade conflict woes receded and allowed the market to turn its attention back to dollar-supportive fundamentals, notably the surge by U.S. yields, the greenback had risen without pause through much of the past week.

Shin Kadota, senior strategist at Barclays (LON:BARC) in Tokyo said that revived expectations that the U.S. economy would perform well thanks to tax cuts and increased fiscal spending are supporting the dollar.

Kadota said that yields rose and equities slipped before but the situation is a little different, as expectations toward the U.S. economy are now stronger.

Tuesday’s data on U.S. consumer confidence and new home sales, both stronger in April, supported the case that the world’s biggest economy will continue to grow in the coming quarters.

The U.S. currency was 0.1 percent higher at 108.900 yen. It pulled back from a 2-1/2-month high of 109.200 set the previous day when the Dow (DJI) and the S&P 500 (SPX) posted their biggest declines since April 6.

Analysts said the dollar was still likely headed for further gains in the longer-term, while the weakening by equities was supportive for the yen, often sought when stocks fall due to its perceived safe-haven status.

Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo said that at first glance, the situation is similar to February, when U.S. yields rose sharply and equities tumbled. But the difference this time is that the response by equities is more measured, and yen demand stemming from ‘risk off’ is not nearly as strong.

The market’s attention is firmly back on interest rate differentials and this is likely to keep supporting the dollar going forward.

The spreads between U.S. yields and those of its European and Japanese counterparts have widened significantly among diverging monetary policy expectations.

The gap between U.S. and German 10-year government bond yields, this week, has hit its widest in 29 years and the U.S.-Japanese 10-year yield spread reached its broadest in nearly 11 years.

The 10-year Treasury yield (US10YT=RR) extended its overnight rise and touched the four-year peak of 3.009 percent, reflecting the durability of the U.S. economic expansion. Accelerating inflation and concerns about increasing debt supply have also driven yields higher.

On Tuesday, Wall Street dropped sharply as warnings by bellwether companies of higher costs stemming from the surge in yields reverberated.

The pound was effectively flat at $1.3981. On Tuesday, it plumbed a one-month low of $1.3919 before rebounding 0.3 percent, seen to have been supported in part by news about a possible takeover of British pharmaceutical company Shire Plc (L:SHP) by Japanese drugmaker Takeda Pharmaceutical Co (T:4502).

The Australian dollar pour 0.2 percent to $0.7586 and in close reach of a four-month trough of $0.7576 plumbed the previous day.

The New Zealand dollar extended losses and dipped to $0.7102, its weakest since Jan. 4. This month the kiwi, on track for its seventh session of losses, has slumped 2 percent.

The currency has faced pressure from a resurgent dollar and also by increasing expectations that the Reserve Bank of New Zealand would hold off from raising rates through 2018 after data last week showed the country’s inflation nearing the bottom of the central bank’s target./

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