US dollar gains ahead of key central bank meetings

London

THE US dollar gained for a second consecutive session on Monday as traders cut their bearish dollar bets to four-month lows on rising US Treasury yields ahead of key central bank meetings.

Gains in the greenback were more pronounced against low-yielding currencies such as the euro and the British pound while high-yielding currencies like the Australian dollar fared relatively better.

"Monday's trading theme is a continuation of the pattern we have seen in March and we have to see what the Fed does later this week to see if the rise in bond yields and dollar strength versus low yielders can carry on," said Kenneth Broux, an FX strategist at Societe Generale in London.

The US, Japanese and British central banks, along with those in some key emerging markets, are all set to meet this week, with benchmark 10-year Treasury yields trading at 1.6320 per cent on Monday, close to Friday's top of 1.6420 per cent, a level last seen in February.

Rising US yields have lifted the greenback 2 per cent so far this year thanks to widening interest rate differentials relative to other major bond markets. The dollar declined more than 4 per cent in the last quarter of 2020.

The dollar index, which tracks the US currency against six major peers, held at around 91.84 in early London trading. It hit a late November 2020 high of 92.51 last week.

The US currency has been supported by a paring of bets for its decline, with speculators cutting net short positions to the lowest since mid-November in the week ended March 9.

Rising bond yields will continue to focus minds this week before a Federal Reserve meeting at which some analysts expect policymakers to strike an optimistic tone on the US economy.

While there are some expectations that the Fed might try to calm bond markets - yields have risen some 60 bps since the last Fed meeting - the consensus view is that Fed chief Jerome Powell will not make changes to policy settings.

US producer prices increased strongly in February, leading to the largest annual gain in nearly 21/2 years, with the economy set for a massive shot in the arm from President Joe Biden's US$1.9 trillion stimulus package.

The greenback rose 0.01 per cent against the yen to 109.05, drifting to its highest since June 2020. REUTERS