US dollar hits 5-week high on Treasury yields surge

London

THE US dollar climbed to its highest in more than five weeks, while other major G-10 currencies dropped, as higher US Treasury yields made the dollar more attractive to investors.

US Treasury yields have surged since the end of last week, after the Federal Reserve said it will likely begin reducing its monthly bond purchases as soon as November and hinted that interest rate hikes may follow. At 11.32am GMT, the US dollar index was up 0.2 per cent at 93.6, having earlier hit 93.67, its highest since Aug 20.

"It's squarely down to the yield performance in the US bond market," said Neil Jones, head of FX sales at Mizuho. "Ten-year Treasuries have crossed that psychological border of 1.5 per cent. Among major economies around the world, it's tough to get 1.5 per cent return on a currency and now the dollar interest rates are pushing in that direction, so it makes (the dollar) more attractive."

Risk aversion exacerbated the currency market moves, he added, with equity markets down.

The Australian dollar, which is seen as a liquid proxy for risk appetite, was down 0.5 per cent at US$0.72525.

The euro was down 0.1 per cent versus the dollar at US$1.1686 .

"Amid the many cross-currents in FX markets right now - energy, Evergrande, US debt ceiling, Delta - one theme that seems to be gaining traction is that the market lies on the cusp of reassessing the path for the Fed tightening cycle," ING strategists wrote in a note to clients.

"A big move higher in the short-end is the key reason why we are bullish on the dollar, particularly from Q2 next year, but we will closely monitor and reassess whether that move needs to come earlier - largely a function of timing the take-off in short-end rates."

The Japanese yen dropped to its lowest in nearly three months against the US dollar, down 0.3 per cent on the day at 11.385 as of 11.40am GMT.

The yen is the G-10 currency most correlated with US two-year and 10-year Treasury yields, MUFG currency analyst Lee Hardman said in a note to clients. "Upward pressure on US yields should continue to provide a lift for USD/JPY in the near term," he said, though he added the yen is "deeply undervalued", which could limit the extent of the weakness.

ING strategists said the yen's weakness was also due to Japan's role as a large energy importer. Oil prices climbed for a sixth day on Tuesday and prices of liquefied natural gas and coal also rose. REUTERS