Dollar strengthens while wiping out weekly loss and U.S. Treasury yields rise

A fresh spike in U.S. Treasury yields sparked a risk-off move in global currency markets on Friday, with the dollar reversing its fall from earlier in the week and riskier currencies taking a hit.

Market participants have grown wary in recent weeks that there could be a spike in inflation caused by massive fiscal stimulus and pent-up consumer demand when economies reopen from coronavirus lockdowns.

US Dollar surges to three-month high. pic.twitter.com/E9Dih245Jw

— Daniel Lacalle (@dlacalle_IA) March 5, 2021

Although soft U.S. CPI data on Wednesday went some way to calm those fears, U.S. Treasuries sold off again on Friday, with the 10-year yield rising above 1.6%.

The dollar was up 0.5% on the day at 91.907 by 1149 GMT, and on track to end the week little changed overall having failed to regain Tuesday’s peak of 92.506, which was its strongest since November.

“There is concern over inflation in the months ahead and that sense is dollar-supportive,” said Neil Jones, head of FX sales at Mizuho.

“It looks like pretty upbeat in the United States in terms of rollout of further vaccine plays, and of course that feeds into the economic recovery in the States, and a time when fiscal stimulus is extremely high, monetary stimulus is extremely high,” he said.

President Joe Biden told U.S. states on Thursday to make all adults eligible for a coronavirus vaccine by May 1, hours after he signed a $1.9 trillion stimulus bill into law.

Mizuho’s Jones said he thought the strengthening on Friday was likely to be temporary.

“My personal view is that the dollar is not on a trajectory for a higher fundamental trend,” he said.

Riskier currencies lost out, erasing recent gains. The Australian dollar – which is seen as a liquid proxy for risk appetite – fell by 0.7% to 0.774310 versus the U.S. dollar.

The New Zealand dollar was down around 0.9% against the U.S. dollar. The Norwegian crown lost out to both the euro and dollar.

The European Central Bank said on Thursday that it would increase the pace of its money printing to prevent a rise in euro zone bond yields.

Although the euro was down around 0.6% at $1.1918, it was set for a small weekly gain.

“The ECB “holistic” approach to keep financing conditions favorable is too vague in our view to focus minds and drive the EUR lower; the US data and the Fed remain the main market drivers,” BofA FX strategists wrote in a note to clients.

Market attention now turns to the U.S. Federal Reserve’s policy meeting next week, where traders will be looking for any comments about rising yields.

ING strategists wrote in a note to clients that the market will probably wait until after the Fed’s meeting before pushing the dollar index into 90 and 91 territory.

Dollar-yen was up around 0.4%, changing hands at 108.945 , close to the 109.235 reached on Tuesday which had been the yen’s weakest since June 2020.

Versus China’s offshore yuan, the dollar was up around 0.5%.

The dollar was gaining some support versus Asian currencies because of rising U.S.-China tensions, said Derek Halpenny, head of research at MUFG.

The Biden administration amended licences for companies to sell to China’s Huawei, further restricting companies from supplying items that can be used with 5G devices.

Elsewhere, bitcoin dipped to $56,475.11, having come close to, but not exceeded, the recent record high of $58,354.14.

(Reporting by Elizabeth Howcroft, editing by Larry King, Kirsten Donovan)

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