Dollar at 10-month high as US yields spike

The dollar stood by 10-month highs against a basket of major currencies on Tuesday, supported by US bond yields scaling 16-year peaks, while the yen tiptoed deeper into the intervention danger zone.

A combination of resilient economic data, hawkish Federal Reserve rhetoric and a budget deficit to be financed by borrowing has the 10-year Treasury yield up more than 45 basis points (bps) in September to top 4.5 per cent for the first time since 2007.

Rates markets are priced for an almost 40 per cent risk of another Fed hike this year, against slimmer chances for another rise in Europe, and the difference has helped prop up a dollar many had bet would swiftly fall as the Fed signalled an end to hikes.

The euro nursed Monday’s 0.5 per cent drop and was parked by a six-month low at $1.0584. It’s on course for a 3 per cent drop in the quarter, its worst quarterly percentage loss for a year.

Sterling is also set to snap three quarters of gains, with a loss of 3.8 per cent over the three months to September. It fell to a six-month low of $1.2195 overnight and traded only a whisker above that level in the Asia session.

The US dollar index touched its highest since November at 106.1 on Monday and was at 106.03 on Tuesday.

“From here it eyes levels around 107.20,” said analysts at Australia’s Westpac bank. “Few currencies will resist the bullish dollar macro resiliency theme and the euro and Chinese yuan look more vulnerable than most.”

Last week also brought more signs that central banks beyond the Fed are reaching the end of their hiking cycles.

The Swiss franc has tumbled through its 200-day moving average to hit its lowest since June after the central bank surprisingly kept short-term rates on hold.

The yen has slowly but inexorably slid toward the 150-per-dollar mark as policymakers stuck with ultra-easy settings.

The psychological level is seen as a likely red line for the finance ministry, whose warnings of possible intervention have stepped up in recent weeks. Traders have an eye on a Tuesday meeting of political leaders and Bank of Japan officials.

The yen hit 148.97 to the dollar on Monday and last traded at 148.88.

Rising commodity prices have provided some support to the antipodean currencies, though they have been mostly sideways for the past month or so. The Aussie was last steady at $0.6417 and the kiwi at $0.5962.

China’s yuan <CNY=CFXS> held at 7.3099, but only thanks to its trading band midpoint being fixed some 1400 bps firmer than forecast, leaving it very close to the weak end of its allowed trading band.

US consumer confidence and home sales data is due later on Tuesday, with slight weakening seen on both fronts though there are doubts that that could much dent the dollar.

“Even if the US economy is headed for a slowdown, the dollar could find support on the back of haven demand given broad based concerns over weak global growth,” said Rabobank’s senior FX strategist Jane Foley.

“We remain of the view that the dollar is unlikely to weaken significantly until Fed rate cuts are firmly on the horizon,” she said. “We are currently trading fairly close to our long-held euro/dollar $1.06 target. We see downside risk to this.”