US dollar slips on euro as lower US yields give markets a breather

THE US dollar slid on Tuesday (Oct 4), as US Treasury yields paused its upward climb, providing brief relief to share markets and helping the euro in particular move further off multi-year lows.

The Australian dollar was also in focus, sinking after the nation’s central bank surprised markets with a smaller-than-expected interest rate hike.

The euro was last up 0.67 per cent at US$0.9889, a moderate recovery from its 20-year low of US$0.9528 on Sep 26, while sterling was up a touch at US$1.1337, off a record low of US$1.0327 also hit Sep 26.

A calmer British government bond market was a relief for the pound after recent government-inspired turmoil. In a statement on Monday, the Bank of England reaffirmed its willingness to buy long-dated gilts and the head of Britain’s debt management office, overseeing the bond market, told Reuters in an interview the market was resilient.

However, demand was soft for a sale a 40-year British government bonds.

“The pullback by the US dollar has coincided with a sharp correction lower for US yields,” MUFG analysts said in a note to clients, adding that the two moves had “brought some much-needed relief for risk assets and high-beta currencies.”

MUFG flagged the New Zealand dollar up 2.6 per cent since the start of the week and Norwegian crown, up 3 per cent this week, as particular beneficiaries.

The US dollar index was down 0.55 per cent at 111.12 having traded as high as 114.78 last week.

The moves in the US dollar and yields appear to partially reflect market participants’ greater comfort that the Federal Reserve (Fed) is moving closer to the end of its rate hike cycle, MUFG said, expectations that were supported by weak US manufacturing data released on Monday.

“Market expectations for the Fed’s terminal policy rate for next year have come down from around 4.75 per cent to 4.39 per cent,” they added.

The benchmark 10-year Treasury yield was last 3.5815 per cent, down sharply from last week when it briefly poked above 4 per cent.

The relentless climb in US yields, as the Fed raises rates aggressively, has been one factor behind the US dollar’s recent gains.

Shares in Asia and Europe also rose on Tuesday in line with the improved sentiment, following overnight gains in the United States

Elsewhere the US dollar was little changed against the Japanese yen at 144.7 yen, keeping below 145 after briefly popping above that level on Monday for the first time since Japanese authorities intervened to support their currency on Sep 22.

Japanese Finance Minister Shunichi Suzuki repeated on Monday that authorities stand ready for “decisive” steps in the foreign exchange market if “sharp and one-sided” yen moves persisted.

The Australian dollar was down 0.64 per cent at US$0.6472, dragged down after the Reserve Bank of Australia (RBA) raised rates by a smaller-than-expected 25 basis points, saying rates had increased substantially in a short period of time.

“Obviously the RBA hasn’t been persuaded by what other central banks are doing, which does make the comment that they don’t have any concerns about the exchange rate down here,” said Ray Attrill, head of FX strategy at National Australia Bank in Sydney.

“There’s no evidence yet that other central banks are about to step down the aggression with which they are tightening policy, (so) I think it makes sense for Aussie to be below 65 for the time being.” REUTERS