Greenback features as fears of inflation drive yields increased

© Reuters

From Peter Nurse – The dollar rose higher early in Europe’s trading day, boosted by a sharp surge in US Treasury bond yields, while riskier currencies were hit hard on fears that central banks will tighten sooner than expected.

At 3:55 a.m. CET (0755 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, rose 0.4% to 90.468, also higher for the week and just 0.2% lower this month.

fell 0.3% to 1.2137 after hitting a seven-week high Thursday, fell 0.6% to 1.3933, fell 0.1% to 106.07 after hitting earlier had touched 106.43 for the first time since September.

The risk-sensitive score fell 0.6% to 0.7823 after previously trading near a three-year high. It fell 0.5% to 0.7338 after hitting 0.7463 on Thursday, a level not seen since August 2017, while rising 0.3% to 1.2632.

Treasuries, and US Treasuries in particular, have become the focus of markets around the world as traders now anticipate an aggressive spike in inflation as economies rebound on extreme fiscal stimulus and very loose monetary policy. The fact that a Treasury auction on Thursday saw the lowest rate of all bids relative to the intended sales volume triggered a broad collapse in risk sentiment across all markets. The benchmark's 10-year US Treasury note yield briefly exceeded 1.6% to trade at its highest level in more than a year.

While the central bank's rhetoric has remained very cautious – particularly the testimony from Federal Reserve Chairman Jerome Powell this week, the surge in bond yields suggests a growing belief that monetary policy needs to be tightened faster than originally envisaged.

“The risks tend to increase the returns more quickly. History has shown us that it can be difficult to deviate from a very simple central bank policy, ”said Nordea analysts in a research note. "While Powell has promised for the time being that substantial bond purchases will continue, it may not be so far in the future to streamline that communication."

The bank says the dollar is in danger of again misrepresenting the consensus to strengthen rather than weaken in 2021, and lowers its year-end forecast for EUR / USD to 1.16.

The currencies favored for leveraged carry trades all suffered as a result, rising 0.3% to 7.3561 in Europe.

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