Dollar near three-and-a-half-month peak, supported by rising U.S. bond yields

On Thursday, the dollar traded near a 3-1/2-month high against a basket of currencies, bolstered by higher U.S. Treasury yields, led by the 10-year benchmark breaching the 3 percent threshold this week for the first time in four years.

On Wednesday, the 10-year U.S. Treasury yield (US10YT=RR) set a fresh four-year high of 3.035 percent, driven by worries about the growing supply of government debt and inflationary pressures from rising oil prices.

A rise to levels beyond 3.041 percent would take the U.S. benchmark 10-year yield to its highest since July 2011. The recent jump in U.S. bond yields has caused U.S.-Japan and U.S.-German yield differentials to widen further in the dollar’s favor, leaving the yen and the euro lower.

Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore wrote in a note that unless there is a very unlikely massive meltdown in U.S. equity markets, it is doubtful the Fed will waver on a June rate hike.

Innes added that with equity market sentiment holding firm in the face of rising bond yields, the almighty dollar could move through G-10 currency markets like a wrecking ball.

The measure of the greenback’s strength against a basket of six major currencies, which is dollar’s index, was at 91.136 (DXY), having risen to a high of 91.261 on Wednesday, its strongest since Jan. 12.

Wall Street halted into positive territory on Wednesday on optimism over a spate of upbeat earnings, although that was nearly offset by jitters over rising U.S. bond yields and corporate costs.

The euro rose 0.2 percent to $1.2179 (EUR=) but was still within sight of a near two-month low of $1.2160 set on Wednesday. The near-term focus is on the European Central Bank’s rates review due later on Thursday.

On Thursday the ECB is set to keep policy unchanged, playing down worries over recent softness in the euro zone economy and leaving the door open to ending its lavish bond purchase scheme by the close of the year.

YEN’S APRIL WOES

Against the yen, the dollar set a 2-1/2-month high of 109.49 yen but later eased to 109.30 yen, down 0.1 percent.

Teppei Ino, analyst for MUFG Bank in Singapore said that the dollar may soon test some key technical levels near 110 yen. Ino said that one key level for the dollar is 109.65 yen, a 50 percent retracement of its November to March decline, and another is its 200-day moving average near 110.27 yen.

The dollar has gained 2.8 percent against the yen, so far in April, putting it on track for its biggest monthly gain since November 2016.

Sim Moh Siong, FX strategist for Bank of Singapore said that the yen’s recent weakness has probably been driven in part by Japanese investors increasing their exposure to foreign currencies at the start of Japan’s new financial year.

Sim also said that still, the yen may see its near-term losses limited at around 110 per dollar.

Sim said that the Japanese currency likely holds attraction for overseas investors looking to diversify their currency allocations, given that the yen’s real effective exchange rate — its trade-weighted and inflation adjusted exchange rate — still appears relatively cheap on a longer-term basis.

He added that Yen will be valuable as a diversifier./Reuters.com

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