NEW YORK: The dollar rose to a one-week high on Tuesday following a jump in benchmark U.S. Treasury yields, while the yen steadied after initially sliding as the Bank of Japan said it would stick to its ultra-loose monetary policy.
The U.S. Federal Reserve meets next week and likely will signal that it will raise rates in March for the first time since the start of the coronavirus pandemic.
The fed funds futures have priced in four rate hikes in 2022.
As investors prepared for the possibility of the Fed being more hawkish than expected, Treasury yields jumped, with two-year yields - which track short-term rate expectations - crossing 1% for the first time since February 2020.
The U.S. 10-year yield also hit a two-year peak of 1.856% overnight.
In line with Treasury yields, the dollar strengthened against a basket of currencies, hitting a one-week high of 95.638. It was last up 0.4% at 95.608.
“The dollar’s gains are being driven by the fact that markets have shifted to the possibility that the Fed could tighten policy a lot faster than expected,” said Chester Ntonifor, chief foreign exchange strategist at BCA Research in Montreal.
But Ntonifor noted that the dollar’s gains are likely sustainable only in the short-term, about three to six months.
“To the extent that you have captured investors’ minds that the Fed is going to be one of the more hawkish central banks in 2022 in raising interest rates, there are going to be these inflows into the dollar on speculative positioning,” Ntonifor added.
The euro hit a one-week low of $1.1350 and was last down 0.5% at $1.1351.
German investor sentiment hit its highest in six months in January on expectations that COVID-19 cases will fall by early summer, allowing growth in Europe’s largest economy to pick up, the ZEW survey showed.
As oil prices hit a seven-year high and global equity markets slumped, Germany’s benchmark 10-year government bond yield came close to, but did not exceed, 0%.
The yen slipped against the dollar after the Bank of Japan said it would maintain its ultra-loose monetary policy even as its global counterparts move towards exiting crisis-mode policies.
By late morning trading, the dollar was flat against the yen at 114.55, with the pair having reached as high as 115.06 overnight.
“The widening divergence between BoJ and Fed policy expectations should continue to place upward pressure on USD/JPY,” MUFG currency analyst Lee Hardman wrote in a note to clients.
The Australian dollar fell, down 0.2% on the day at US$0.7193. The New Zealand dollar was also down 0.3%.
China’s central bank, meanwhile, plans to do more to support growth, while steadily lowering financing costs and keeping the yuan exchange rate stable, the bank’s vice governor said.
The central bank unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, with market analysts expecting more policy easing this year to cushion an economic slowdown.
The yuan hit its highest in more than three years versus the dollar, helped by trade settlement inflows. The dollar was last up 0.1% at 6.3525 yuan.