US dollar steady vs major currencies, underpinned by higher US yields

THE US dollar held firm against major currencies on Thursday (Oct 19) and gained against more volatile ones, underpinned by the US 10-year yield nearing the 5 per cent level and before remarks by Federal Reserve chair Jerome Powell at a discussion on the economy.

The US dollar index, which tracks the unit against six main peers, was steady at 106.5 on the day, having risen 0.33 per cent on Wednesday.

Its moves were more dramatic against currencies that are particularly exposed to swings in global growth expectations, with the Australian dollar and New Zealand dollar each down as much as 0.6 per cent. The New Zealand currency hit its lowest level in a year of US$0.5815.

The British pound – also traditionally more vulnerable to global swings – was down 0.2 per cent at US$1.2118, while the euro was 0.1 per cent firmer at US$1.05515. Neither currency was far from multi-month lows hit in early October.

“Over the last day or so, the spike higher in yields has hurt risk sentiment in markets, we saw a sell-off overnight in global equity markets and that risk-off trading is driving FX markets particularly in the high-beta commodity currencies,” Lee Hardman, senior currency analyst at MUFG, said.

“Other majors have been more stable, even as yields continue to move higher. Maybe there is some caution ahead of Powell later in the day.”

Both long and short-dated US yields hit 16-year highs on Thursday, with selling pushing the 10-year yield to almost 5 per cent, a psychologically significant level. European and Japanese bonds were also under pressure.

Powell will participate in a discussion on the economic outlook at the Economic Club of New York, a few days before the traditional quiet period ahead of the rate-setting Federal Open Market Committee meeting on Oct 31-Nov 1.

Prior to his remarks, policymakers appear to be in agreement to hold interest rates unchanged at their next meeting, but uncertainty about what happens afterwards is high.

Other policymakers also face dilemmas. Japan is struggling with a weak yen, and Japan’s top currency diplomat said on Thursday that, although not acting in response to excessive currency moves could hurt the vulnerable, it would be better if they did not have to intervene.

The US dollar was last at 149.82 yen, closing in on the psychologically significant 150 yen level that earlier this month triggered a sharp sudden strengthening for the yen, although analysts say the indications suggest Japan did not intervene.

US dollar/yen could be pushed higher depending on whether US yields continue to rise at a faster pace than their Japanese peer yields, Carol Kong, currency strategist and economist at the Commonwealth Bank of Australia, wrote in a note.

“The implication is the risk of FX intervention by the Bank of Japan remains high in our view,” said Kong.

The yen, a traditional safe haven, has not benefited much from risk aversion due to the war in the Middle East, unlike the Swiss franc, which has strengthened sharply.

The euro was last steady against the franc at 0.9471 though it hit a one-year low of 0.9449 franc on Wednesday. REUTERS