US dollar in command as euro and pound slide to 6-month low

THE US dollar scaled a 10-month high on Wednesday (Sep 27), pushing the euro and sterling to a six-month low and keeping the yen deep in intervention territory, as the prospect of higher-for-longer US rates gripped markets.

US Treasuries stabilised after their recent heavy sell-off, though yields remained near 16-year peaks, keeping the greenback solidly bid.

The euro was last down 0.3 per cent at US$1.0534, its lowest level since Mar 15. The single currency is on track to lose more than 3 per cent in the three months to end-September, its worst quarterly performance in a year.

Sterling eased 0.2 per cent to its lowest since Mar 17 at US$1.2134, and was headed for a quarterly loss of more than 4 per cent.

The US dollar index, which measures the greenback against a basket of other major currencies, peaked at a 10-month high of 106.49.

“It’s clear now that markets see higher long-term yields in the US for a longer period. That’s the main driver for the US dollar here,” said Dane Cekov, senior FX strategist at Nordea.

“It’s been a while since we’ve seen 10-year yields at 4.5 per cent.”

Fed officials have in recent days flagged the possibility that the central bank would need to raise interest rates further, after it kept rates steady last week but stiffened its hawkish monetary policy stance.

That has sent US Treasury yields to multi-year highs as money markets have adjusted expectations of where US rates could peak, and for monetary conditions to remain tighter for longer than initially thought.

The benchmark 10-year yield was last at 4.507 per cent, after hitting a 16-year high of 4.566 per cent on Tuesday. The two-year yield stood at 5.06 per cent.

Elevated US yields have spelt trouble for the yen, which slipped to an 11-month low of 149.25 per US dollar.

The US dollar/yen pair tends to be extremely sensitive to changes in long-term US Treasury yields, particularly at the 10-year maturity.

The yen’s slow-but-steady decline to the psychological level of 150 per US dollar has put traders on high alert for any signs of intervention from Japanese authorities, as officials ramp up their rhetoric against the sliding currency.

The 150 zone is seen by some as a red line that would spur Japanese authorities to intervene, like they did last year.

“The fundamental upside pressure (to US dollar/yen) from bond yields is simply too great to ignore,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“Even if there were intervention, it won’t drive US dollar/yen down permanently unless bond yields start to retreat in earnest too.”

Minutes of the Bank of Japan’s July meeting released on Wednesday showed that policymakers agreed on the need to maintain ultra-loose monetary settings but were divided on how soon the central bank could end negative interest rates.

Elsewhere, the Aussie fell 0.5 per cent to US$0.6365, barely blinking at Wednesday’s data pointing to an acceleration in Australia’s inflation last month, matching expectations.

“Today’s report does nothing to change the dial for the (Reserve Bank of Australia) in my view, which will likely hold rates at 4.1 per cent at their next meeting,” said Matt Simpson, senior market analyst at City Index.

The Swedish krona has bucked the recent trend, strengthening broadly against the US dollar and euro this week, after the central bank on Thursday announced it would hedge part of its forex reserves to reduce risk.

“The news that the Riksbank would be hedging some of its reserves was a surprise, and has been driving the Swedish krona this week,” Nordea’s Cekov said.

The US dollar last bought ll.045 krona, having slipped almost 1 per cent so far this week and is on track for its biggest weekly drop against Sweden’s currency since mid-July. REUTERS