The dollar is attacking on all fronts

 Dollar strengthens amid sharp jump in US yields, pound falls to weekly low

The dollar is attacking on all fronts

The US dollar edged higher against most major currencies on Friday, boosted by higher yields on US bonds the day before, while the pound fell to its lowest level in a week.

Government bonds, and especially US Treasury bonds, have become the focus of global markets. Traders aggressively began to quote earlier monetary tightening than reported by the Federal Reserve and other central banks.

European equities continued to sell off globally, with risk appetite deteriorating as higher yields sparked concerns about inflation. Emerging market currencies and commodities continued their decline on Thursday. Cryptocurrencies have stabilized after falling overnight.

The movement of the dollar "depends on what happens to the yield," said Jeremy Stretch, head of G10 FX strategy at CIBC World Markets. Stretch said the 10-year bond yield briefly exceeded the S&P 500 dividend yield on Thursday, indicating "serious uncertainty."

“But I think we will continue to see exhortations from central banks against the idea of ​​an earlier than expected policy reversal, and this, along with some easing of some uncertainty at the end of the month, will provide a more constructive backdrop for high beta currencies against the dollar early next months, ”he said.

The dollar index climbed to 90.39, holding a 0.2% gain since Thursday, when it recovered from a whopping 0.26% loss before the bond auction. That leaves him with a loss of less than 0.2% in the month after rising 0.6% in January.

The dollar lost 0.1% to 106.115 yen after earlier hitting 106.43 for the first time since September. The pair is up 2.8% this year after its first consecutive monthly gain since mid-2018, making the yen one of the worst performing major currencies in 2021.

Both the dollar and the yen are considered safe haven currencies, but the yen tends to decline as US yields rise and the dollar strengthens.

Bond yields have surged this year amid the prospect of massive fiscal stimulus amid continued super-soft monetary policy by the United States.

The accelerating pace of vaccinations around the world has also contributed to what has been dubbed the reflation trade, referring to the bets on growth in economic activity and prices. Sterling , which benefited hugely from the realization of the reflation story, fell to its lowest level in a week to $ 1.3901, shedding 0.6% against the dollar on the day.

However, inflation-adjusted bond yields have accelerated in recent days, indicating growing confidence that central banks may have to abandon ultra-soft policies despite their dovish rhetoric.

"The dynamics of the bond market is becoming increasingly threatening for risky assets," after the initial rise in yields was interpreted as "a history of improving growth expectations," Westpac strategists wrote in a note to a client.

"It seems that bond markets are 'going against' the worldview of central banks, and it is unwise to stand against the current momentum."

The estimated yield on 10-year Treasuries suddenly surged above 1.6% for the first time in a year after the $ 62 billion seven-year bond auction was met with weak demand. Hedge fund employees worked all night. Fundamental bond models have failed completely. It was only technical factors who worked.

The Australian dollar continued its decline after surpassing $ 0.80 on Thursday for the first time since February 2018, shedding more than 0.6% to $ 0.78050.

The New Zealand currency fell 0.4% to $ 0.7336 after hitting $ 0.7463 on Thursday, a level not seen since August 2017.

The Canadian dollar fell 0.1% to C $ 1.2620 after falling from a three-year high of C $ 1.2468 overnight.

The euro fell 0.3% to $ 1.2142 after hitting a seven-week high of $ 1.22435 on Thursday.

Bitcoin fell 5% to $ 44,713. Ethereum was trading at $ 1,479 after falling 9%.

Ritvika Carvalho and Kevin Buckland © 2021 Thomson Reuters

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