NEW YORK: The dollar strengthened and the euro weakened in sideways trade on Tuesday after European Central Bank President Christine Lagarde strived to keep expectations of rising interest rate hikes at bay that has sent bond markets into a tizzy.
A hawkish tone from both the ECB and the US Federal Reserve last week surprised markets and sent yields on euro zone and US debt spiking higher.
The currency market has broadly traded little changed as traders and investors wait for US consumer price data on Thursday.
The dollar index rose 0.217%, with the euro down 0.23% to $1.1416.
“It’s all about what’s going on in the debt market,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “For the second day in a row the two-year German yield is softer, and that stops a nine-day increase. It had to do with Lagarde’s pushback yesterday.”
The German two-year bund surged to -2.54% on Friday, up from -0.654 on Jan. 25, while the 10-year US Treasury benchmark topped 1.97% on Tuesday, a jump from about 1.73% over the same period.
Bond concerns were particularly acute for the so-called peripheral economies in Europe where inflation-adjusted Italian yields are just a shade from popping into positive territory.
Lagarde struck a more cautious tone, saying high inflation is unlikely to get entrenched and ECB council member Pablo Hernandez de Cos on Tuesday said any central bank move “has to be gradual”.
“Can the euro go higher if periphery spreads blow out and if Italian 10-year real yields turn positive, can the economy cope with that,” said Kenneth Broux, a strategist at Societe Generale in London. “That is the million dollar question investors are asking.”
Investors were also looking carefully at the future trajectory of interest rates between the United States and Europe.
Investors are well aware that policy rates are set to climb much more in the United States than in the eurozone in coming months, Unicredit strategists said.
The Japanese yen weakened 0.39% versus the greenback at 115.58 per dollar, while sterling was last trading at $1.3549, up 0.11% on the day.
While money markets were pricing in as much as 134 bps in cumulative rate hikes from the Fed over the remainder of 2022, analysts were expecting 50 bps in hikes from the ECB over that period.
Still, the short-term outlook has tilted in favor of the single currency, with the widely watched bond yield spread between US and German 10-year debt narrowing in late January to around 170 bps from an April high of 194 bps.
On Monday, bitcoin and the Australian dollar had posted gains as equity markets rallied in Europe, but the latter was a bit softer on Tuesday as a cautious mood prevailed in Asia. The Aussie was broadly flat at $0.7120. AUD/
Bitcoin punched through its 50-day average to top $44,000 for the first time in nearly a month on Monday and held there in Asia for a gain of more than 17% in four sessions. Bitcoin last fell 1.47% to $43,457.00.