LONDON: Spiking US bond yields boosted the dollar on Thursday, helping it to revive from two-week lows, after the Federal Reserve pushed back against speculation over interest rate hikes.
US 10-year Treasury yields rose to their highest levels in 13 months early in London trade, climbing above 1.70% for the first time since Jan. 24, 2020.
The dollar index, which measures it against a basket of its peers, rose as much as 0.4% to 91.761, off a two-week low of 91.300 hit after Wednesday’s Fed meeting.
Fed Chair Jerome Powell dampened speculation the stronger economic outlook could propel the central bank to wind back its stimulus.
The Fed sees the US economy growing 6.5% this year, which would be the largest annual jump in gross domestic product since 1984. Inflation is expected to exceed the Fed’s 2% target to 2.4% this year, although officials think it will move back to around 2% in subsequent years.
“The question remains whether the Fed can actually arrest the latest spike in US Treasury yields, especially given that the improvement of US fundamentals will continue,” Valentin Marinov, head of G10 FX research at Credit Agricole in London, said. “The renewed spike of UST yields should continue to support the dollar versus low-yielders like the euro, yen and the Swiss franc.”
Marinov said the Fed meeting had disappointed dollar bulls and the currency may be “nursing its wounds versus risk-correlated and commodity currencies in the very near term”.
The euro eased to $1.19405, off a one-week high of $1.19900 after it rallied 0.6% on Wednesday.
Norway’s crown reached its strongest against the euro in 13 months - 10.0240 crowns per euro - after the country’s central bank left rates unchanged, though it shifted its forward guidance to signal that a rate increase may follow in the second half of this year amid signs of economic recovery.
“A hint at the late 2021 rate hike was delivered (and is now in the price), but we see risks skewed to an earlier and a faster tightening cycle (ie two hikes possibly delivered this year, with the first one coming in late Q3),” ING’s developed markets economist James Smith and chief EMEA FX and IR strategist Petr Krpata said in a research note.
“This points to the generally upbeat NOK (Norwegian crown) prospects across the board, and also against its regional peer SEK (Swedish krona), where the Riksbank is highly unlikely to hike interest rates either this year or next.”
Against the yen, the dollar gained 0.2% to 109.050 yen .
A Nikkei report said the Bank of Japan (BOJ) was expected to slightly widen an implicit band in which it allows long-term interest rates to move around its 0% target.
A Reuters poll this month found two-thirds of Japanese firms had expected the BOJ to curb rises in long-term interest rates and keep them steady before its review this week on how to make its stimulus policy more sustainable.
The British pound fell 0.2% to $1.3937., after the Bank of England left its stimulus programme unchanged on Thursday. The BoE also held its benchmark interest rate at a record low of 0.1%, in line with forecasts in a Reuters poll of economists.
The Australian dollar rose to a two-week high of $0.7849 before trimming some gains. Its New Zealand counterpart lost momentum after the country posted a surprise contraction in GDP in the final quarter of last year.
The kiwi last traded at $0.7222.
Bitcoin held firm at $58,092.28, having bounced from Tuesday’s one-week low of $53,221.
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