US dollar firms on sudden spike in Treasury yields

[NEW YORK] The US dollar index lifted off a seven-week low on Thursday after yields on 10-year US Treasuries jumped as high as 1.6 per cent following weaker-than-expected bids in a US 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 US dollar was up 0.27 per cent against a basket of currencies in the early New York afternoon after dipping as much as 0.26 per cent to 89.677, its lowest since Jan 8.

The benchmark 10-year Treasury yield was 1.55 per cent, still up 16 basis points on the day. The spike to 1.6 per cent came in the early afternoon when an auction of US$62 billion of seven-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 US 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 US 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 US$0.8007 against the greenback and was last down 1 per cent at US$0.7882. New Zealand's kiwi hit US$0.7463 and then fell, last off 1.29 per cent for the day.

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

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

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

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

"Some of the currencies that typically don't do well in a global rebound are lagging," Mr Serebriakov said.

Changes in the US 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 US real yields falling and selling dollars across the board," Mr Serebriakov added.

REUTERS