By Elizabeth Howcroft
The previous quarter saw a spike in U.S. Treasury yields and the dollar’s strongest rally in years, on rising expectations that accelerating U.S. economic growth and inflation could force the Fed to abandon its pledge to keep interest rates near zero until 2024.
The International Monetary Fund said on Tuesday that unprecedented public spending to fight the pandemic would push global growth to 6% this year.
But the bond market has stabilized this week, with the 10-year U.S. Treasury yield at 1.6579%, down from its peak of 1.776% at the end of March.
“We have seen USD supported by rising bond yields most of Q1…. now that Q2 has begun, yields are coming off slightly which has softened the dollar in the last couple of days,” said Joe Tuckey, FX analyst at Argentex.
At 1100 GMT, the dollar was down 0.1% on the day at 92.21 against a basket of currencies, close to a two-week low, having fallen from a high of 93.439 that it hit on March 30.
“I suspect that we are dealing with broad-based profit taking on market USD longs,” said Valentin Marinov, head of G10 FX research at Credit Agricole.
Marinov said that in the near-term U.S. Treasury yields and global risk appetite would drive the currency market. As long as yields stay within recent ranges, risk appetite could stay strong, keeping the dollar on the back foot and supporting riskier currencies, he said.
Market participants awaiting the release of Fed meeting minutes later in the session for hints about the Fed policymakers’ views on rising yields.
“Investors will be scanning the minutes in search of any ‘discomfort’ among policymakers about rising inflation prospects and in parallel any hint that the discussion is migrating towards defining a timeline for tapering asset purchases,” ING strategists wrote in a note.
“Any (even mild) hawkish signal surely bears the risk of hitting Treasuries, and providing some support to the dollar.”
U.S. money markets are pricing in a 25 basis point hike in December 2022.
Euro-dollar was up 0.1% at $1.18905. So far in 2021, the euro has fallen, with the euro-dollar pair driven by prospects of the economic recovery from COVID-19 in Europe lagging that of the United States and Britain.
Europe’s benchmark equity index, the STOXX 600, closed at a record high on Tuesday, recovering all of its pandemic-driven losses.
Euro zone business activity bounced back to growth last month, underpinned by a record expansion in manufacturing, PMI data showed.
“Optimism is growing in Europe that the pace of its Covid vaccination programme will be faster than thought previously, which has seen the EUR/USD claw back a chunk of the ground lost since last March,” said Stuart Cole, chief macro strategist at Equiti Capital.
The Australian dollar fell against the dollar, down 0.5% at 0.7627, while the New Zealand dollar was down 0.3%, both pausing their upward trajectory of the last two weeks.
The Canadian dollar also fell, hurt by a third wave of the COVID-19 pandemic in the country.
Elsewhere, finance officials from the Group of 20 major economies are poised to back a $650 billion boost in the IMF’s emergency reserves and extend a freeze on debt payments as part of an effort to help developing countries still struggling to combat the COVID-19 pandemic.
(Reporting by Elizabeth Howcroft; Additional reporting by Ritvik Carvalho and Joice Alves; Editing by Kirsten Donovan, Timothy Heritage and Barbara Lewis)