Currencies

Dollar firms on sudden spike in U.S. Treasury yields

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Key Points
  • The dollar dipped 0.26% against a basket of currencies to 89.797, its lowest since Jan. 8.
  • Easy financial conditions, the promise of fiscal stimulus and accelerating COVID-19 vaccine rollouts have boosted expectations that growth and inflation will accelerate.
U.S. one-hundred dollar banknotes are arranged for a photograph in Hong Kong on April 15, 2019.
Paul Yeung | Bloomberg | Getty Images

The dollar index lifted off a seven-week low on Thursday after yields on 10-year U.S. Treasuries jumped as high as 1.6% following weaker-than-expected bids in a U.S. government debt auction.

The move was the latest example of currency markets taking their cue from bonds, which have been moving on the changing outlook for economic growth and inflation following unprecedented government stimulus and monetary easing along with increasing COVID-19 vaccinations.

The dollar was up 0.27% against a basket of currencies in the early New York afternoon after dipping as much as 0.26% to 89.677, its lowest since Jan. 8.

The benchmark 10-year Treasury yield was 1.55%, still up 16 basis points on the day. The spike to 1.6% came in the early afternoon when an auction of $62 billion of 7-year notes was met with weak demand.

The rise in bond yields, after adjusting for inflation, has accelerated in recent days, indicating a growing belief that central banks may begin to pare back ultra-loose policies, even as officials maintain a dovish rhetoric.

"It has been a global move," said Vassili Serebriakov, an FX strategist at UBS in New York. "Those higher bond yields are a symptom of expectations of a strong economic rebound after the pandemic."

Data on Thursday showed that fewer Americans filed new claims for unemployment benefits last week amid falling COVID-19 infections.

Federal Reserve Chair Jerome Powell reiterated on Wednesday that the U.S. central bank would not tighten its policy until the economy improves.

Commodity-linked currencies, including the Australian, New Zealand and Canadian dollars, all hit three-year highs earlier in the day as their bond yields surged.

"The U.S. has actually lagged a lot of these other countries in terms of the yield moves," said Erik Nelson, a macro strategist at Wells Fargo in New York, noting that New Zealand's 10-year government bond yield had gained 18 basis points on Thursday.

The Aussie reached $0.8007 against the greenback and was last down 1% at $0.7882. New Zealand's kiwi hit $0.7463 and then fell, last off 1.29% for the day.

Weighing on the Aussie were lower oil and U.S. stock prices and a narrowing of Australian and U.S. bond yields, according to strategists at Commonwealth Bank of Australia.

The Canadian dollar got as far as 1.2468 per U.S. dollar, but was last at $1.2610.

The euro rose to a three-week high, gaining 0.5% before backing off. It was last off 0.05% at $1.2164.

The safe-haven Japanese yen, which tends to underperform when global growth improves, weakened as far as 106.29 yen per dollar.

"Some of the currencies that typically don't do well in a global rebound are lagging," Serebriakov said. Changes in the dollar have been different against different currencies recently. "It's not just across the board the way it was last year when everything was driven by U.S. real yields falling and selling dollars across the board," Serebriakov added.