US dollar holds firm as Treasury yield jumps

London

THE US dollar held onto its recent gains on Tuesday after a spike in US Treasury yields lifted demand for the currency.

The greenback had hit a 2½-year low in January after sliding for months as ultra-dovish policy from the Federal Reserve encouraged investors to seek alternative currencies.

But expectations for a wave of spending under an incoming Joe Biden administration have pushed Treasury yields higher, with the 10-year yield reaching a 10-month high on Tuesday. The US dollar has bounced 1.5 per cent since last Wednesday.

Not only have markets brought forward bets on Fed interest rate increases to 2023, many also reckon it could start withdrawing, or tapering, asset purchases earlier.

The US dollar index, which measures the greenback against a basket of currencies, was unchanged at 90.438, above lows of 89.206 hit last week.

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Against the euro, the US dollar stood still at US$1.2153.

The support from rising yields has so far trumped worries that the extra spending could trigger faster inflation.

But many analysts expect the greenback to resume its decline as stimulus spending and vaccine rollouts brighten the global outlook.

ING analysts expected Fed officials to pour cold water on any suggestion of slowing monetary stimulus support. "Any policy-related comments should - in our view - go in the direction of ruling out any unwinding of monetary stimulus in the foreseeable future."

They added: "With the Fed's rate expectations firmly at the bottom, any further rise in US yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call."

Morgan Stanley, however, has recommended a neutral view on the US dollar. It has closed a dollar-bearish trade versus the euro and the Canadian dollar and removed its bullish view on emerging market currencies, in part because US real rates are likely "troughing".

Most emerging market currencies rose on Tuesday, including the offshore yuan, Mexican peso and South African rand.

With equity markets back in a bullish mood, riskier developed market currencies such as the Australian and New Zealand dollars also rose. Both gained about 0.4 per cent .

Bitcoin stabilised at around US$35,500 after Monday's huge drop. REUTERS