Dollar marks one-week top amid higher U.S. yields, ECB caution

September 8, 2021

By Kevin Buckland

TOKYO (Reuters) – The dollar rose to a one-week peak against major peers on Wednesday, buoyed by higher Treasury yields and a weaker euro ahead of a European Central Bank policy decision.

The dollar index, which measures the currency against six rivals, ticked up 0.05% to 92.580, after earlier touching 92.590, a level not seen since Sept. 1.

The euro slipped 0.05% to $1.1836 for the first time since Sept. 2.

The greenback gained 0.08% to 110.385 yen, helped by higher U.S. yields.

The benchmark 10-year Treasury note rose as high as 1.385% on Tuesday for the first time since mid-July, a climb of almost 6 basis points from Friday’s close. Monday was a U.S. holiday.

The dollar index had tumbled to its lowest levels since early August at the end of last week, when a surprisingly soft U.S. payrolls report prompted speculation the Federal Reserve will forgo announcing a taper of stimulus at a policy meeting this month. At the same time, strong wage growth warned of the potential for inflationary pressures to grow.

This week’s dollar strength appears to be the result of a shift in investor focus to wage growth, which “suggests that the Fed may stick with its tapering plan,” Ken Cheung, a strategist at Mizuho Bank in Hong Kong, wrote in a report.

“We look for further upside for the USD.”

However, the surge in COVID-19 deaths in the United States could give the central bank pause. Reuters data shows that more than 20,800 people died from the virus in the past two weeks, up about two-thirds from the prior period. President Joe Biden will outline a plan to tackle the highly contagious Delta variant on Thursday.

Investors will look to a speech by New York Fed President John Williams later on Wednesday for any hints on whether the labour market is still on the Fed’s stated path of “substantial further progress” needed for a taper.

St. Louis Fed president James Bullard told the Financial Times that the central bank should go forward with a plan to start trimming stimulus this year despite the jobs slowdown last month.

“Risk aversion in the air alongside the move up in UST yields have helped the USD extend its post-payrolls recovery,” Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank, wrote in a client note.

“Investors are wary of the ECB meeting on Thursday, anticipating a potential trim to the PEPP (Pandemic Emergency Purchase Programme) bond-buying pace.”

Analysts polled by Reuters see PEPP purchases falling possibly as low as 60 billion euros a month from the current 80 billion, before a further fall early next year and the scheme’s end in March.

Elsewhere, the Reserve Bank of Australia’s decision on Tuesday to forge ahead with a taper of bond purchases while adding the dovish concession of extending the programme to February, helped undermine the Aussie dollar. It slipped 0.07% to $0.73825 on Wednesday, extending the previous session’s 0.7% slide.

Canada’s loonie was mostly flat at C$1.2641 per greenback after tumbling about 0.9% overnight.

Lower oil prices weighed, while investors anticipate a dovish narrative from the Bank of Canada’s policy meeting later Wednesday following an unexpected economic contraction last quarter, NAB’s Catril said.

Meanwhile, cryptocurrencies struggled to rebound from hefty losses overnight, when several trading platforms said they experienced performance issues, although it was not clear if these were a contributor to, or a result of, the volatility.

Bitcoin slipped 1% to around $46,400 after sinking as low as $42,900.01 on Tuesday. Earlier that day it had touched an almost four-month high of $52,956.47.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam and Kim Coghill)

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