Spiking yields steady US dollar after post-Fed wobble

London

SPIKING US bond yields boosted the dollar on Thursday, helping it to revive from two-week lows, after the Federal Reserve pushed back against speculation over interest rate hikes.

US 10-year Treasury yields rose to their highest levels in 13 months early in London trade, climbing above 1.70 per cent for the first time since Jan 24, 2020.

The dollar index, which measures it against a basket of its peers, rose as much as 0.4 per cent to 91.761, off a two-week low of 91.300 hit after March 17's Fed meeting.

Fed chair Jerome Powell dampened speculation the stronger economic outlook could propel the central bank to wind back its stimulus.

The Fed sees the US economy growing 6.5 per cent this year, which would be the largest annual jump in gross domestic product since 1984. Inflation is expected to exceed the Fed's 2 per cent target to 2.4 per cent this year, although officials think it will move back to around 2 per cent in subsequent years.

"The question remains whether the Fed can actually arrest the latest spike in US Treasury yields, especially given that the improvement of US fundamentals will continue," Valentin Marinov, head of G10 FX research at Credit Agricole in London, said.

"The renewed spike of UST yields should continue to support the dollar versus low-yielders like the euro, yen and the Swiss franc."

Mr Marinov said the Fed meeting had disappointed dollar bulls and the currency may be "nursing its wounds versus risk-correlated and commodity currencies in the very near term".

The euro eased to US$1.19405, off a one-week high of US$1.19900 after it rallied 0.6 per cent on March 17.

Norway's crown reached its strongest against the euro in 13 months - 10.0240 crowns per euro - after the country's central bank left rates unchanged, though it shifted its forward guidance to signal that a rate increase may follow in the second half of this year amid signs of economic recovery.

"A hint at the late 2021 rate hike was delivered (and is now in the price), but we see risks skewed to an earlier and a faster tightening cycle (ie two hikes possibly delivered this year, with the first one coming in late Q3)," ING's developed markets economist James Smith and chief EMEA FX and IR strategist Petr Krpata said in a research note. REUTERS