Higher US yields send dollar upwards

The US dollar continues to play bond market ping-pong

The direct correlation between moves in US bond yields and the US dollar saw the greenback spike higher after a surprise leap in US long-end bond yields on Friday. The dollar index climbed 0.20% to 91.68 on Friday. The index fell this morning after US 10-year futures climbed (yields fell) but has moved back to unchanged as the bond futures moved into negative territory.

The US dollar’s advance versus the major and commodity currencies on Friday has left the majors drifting in the middle of their weekly ranges. The Australian and New Zealand dollars remain just below their multi-month support lines, while the Canadian dollar has moved out of danger, for now, USD/CAD falling to 1.2480 on Friday. Overall, the G-10 group is almost unchanged in moribund Asian trading.

Asian currencies retreated in New York on Friday and have edged lower again in Asia, as USD/CNY topped 6.5000 once again. It is now in the middle of its one-week 6.4500 to 6.5500 range, and that pattern is repeated across other Asian currencies. In Asia, the Indonesian rupiah and the Malaysian ringgit, somewhat surprisingly, look the most vulnerable to further US dollar strength. Otherwise, regional markets look to be settling in for a few unspectacular sessions ahead of the FOMC, assuming US bond markets remain calm.

Central banks will be in the spotlight this week, with rate announcements from the Bank of Japan, Bank of England, and the Federal Reserve. Although no Fed Funds or QE programme changes are expected, all eyes will be on the governor’s “dot plots” of future rate expectations. If those are shifted forward, something I doubt given the nervousness in markets, we could be in for another bout of inflation nerves, which could have an impact on the direction of the US dollar.

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