US dollar firms as yields hit highs ahead of Fed guidance

London

THE US dollar firmed on Wednesday with 10-year Treasury yields hitting fresh 13-month highs ahead of a Federal Reserve policy meeting which could shed some light on the timing of future rate hikes and the central bank's tolerance for rising yields.

With Fed policymakers expected to forecast the fastest US economic growth in decades in the wake of Covid-19 vaccinations and US$1.9 trillion in new stimulus, market participants will be focused on clues that the central bank could start raising rates in 2023, earlier than it had said.

In any event, expectations of a faster-than-expected economic recovery will likely weigh.

"US yields might receive further upwards thrust and pull the dollar along with them in the absence of a clear commitment on the part of the Fed that a further rise in yields is undesirable", Commerzbank analyst Antje Praefcke wrote in a morning note.

She said that because the European Central Bank had in contrast committed to increasing the pace of bond buying to keep a lid on rising yields, the euro might suffer against the dollar in the short term.

By midday in Europe, Benchmark 10-year Treasury yields had crossed the 1.67 per cent bar, their highest level since February 2020.

The euro was down 0.05 per cent at US$1.1896 after declining in the past three sessions.

Hurt by a possible delay in the European Union's vaccination effort, the euro seemed set to test last week's 31/2-month low of US$1.1835.

Europe's medicines watchdog will release results of its investigation into incidents of bleeding, blood clots and low platelet counts in recipients of AstraZeneca's coronavirus vaccine on Thursday afternoon.

"There is a risk that public trust on the vaccine has been compromised, and this may weigh on the euro as the vaccination gap between the EU and US may widen even further," ING analysts warned.

Europe's painful recovery from the pandemic is in sharp contrast with other economies, which seem less dependent on monetary stimulus to pull though. The Bank of Canada, for instance, is likely to reduce its bond purchases as soon as next month, strategists say.

At 1155 GMT, the dollar index was up 0.09 per cent and stood at 91.952, having already risen for three straight sessions on support mainly from elevated US bond yields.

Against the yen, the greenback firmed 0.18 per cent to 109.19 yen , hovering near nine-month highs hit this week. REUTERS