US dollar rock solid as benchmark Treasury yield passes 5%, yen in focus

THE 10-year US Treasury yield moved above 5 per cent on Monday (Oct 23), keeping the US dollar supported across the board but without pushing it much higher, while earlier in the day Japan’s yen weakened briefly past the 150-per-US dollar level.

Investors are waiting for several events this week, including a European Central Bank meeting, and the release of US GDP data and the Federal Reserve’s preferred inflation gauge.

But the main news on Monday was the yield on 10-year US Treasuries reaching as high as 5.021 per cent, the latest stage of a relentless sell-off in government bond markets, driven by investors accepting central banks will keep rates persistently high, particularly in the US, an increase in supply of bonds and widening term premia.

Besides that, the risk of Israel’s war on the Islamist group Hamas becoming a wider regional conflict is keeping markets on edge, as Israeli air strikes battered Gaza early on Monday, and the US dispatched more military assets to the region.

The US dollar index was steady at 106.1, with the euro up 0.1 per cent at US$1.06075, and sterling flat at US$1.2170.

Even though it hasn’t risen lockstep with yields, the US dollar has been underpinned by the steady rise in yields at the long end of the US Treasuries curve.

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Since mid-July, the trade-weighted US dollar index is up 6.7 per cent but has been nearly steady this month.

“On paper, it should be a good week for the US dollar. US GDP should come in at over 4 per cent and the Fed’s preferred measure of inflation should still be running hot,” said Chris Turner, ING’s global head of markets.

“In Europe, PMIs and the ECB bank lending survey should show an economy mired in stagnation, if not recession.”

Barclays analysts were less sure the US dollar had much further to go, however, pointing to stretched long US dollar positioning and a smaller likelihood of further rises in long-dated yields without a reassessment of the Fed’s rate outlook.

The Japanese yen last traded at 149.95 per US dollar, after briefly easing early on Monday to 150.14, a level last seen on Oct 3 when traders suspected the Bank of Japan (BOJ) intervened to nudge it back to the stronger side of 150.

The BOJ’s money market data later suggested that the yen’s sudden strengthening was most likely not the product of official Japanese intervention.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, said it seemed like a set of investors were betting the BOJ would defend the 150 level, even as others saw rising US yields as a reason to keep pushing the US dollar up.

“Potentially there are two camps out fighting around 150, so that’s why US dollar-yen doesn’t move from here,” Yamamoto said.

While there was some speculation the BOJ might once again tweak its yield-curve policy band at a scheduled policy review next week, the BOJ had also shown it would not let domestic yields rise sharply, he said.

The recent surge in global interest rates is heightening pressure on the BOJ to adjust its bond yield control stance next week, with a hike to an existing yield cap set just three months ago being discussed as a possibility, Reuters reported on Monday.

The ECB meets on Thursday, and a poll by Reuters shows while it is done raising rates it won’t begin easing until at least July 2024. It raised its key interest rates by 25 basis points in September.

However, in more positive news for the European common currency, on Friday S&P upgraded Greece’s credit rating to investment grade, the first of the “big three” ratings agencies to do so since the country’s debt crisis erupted in 2010. REUTERS