Dollar and the short-end U.S. yields surge

On Friday, the dollar went higher for a 3rd consecutive day in a row since a surprisingly strong U.S. inflation print surprised markets. It also inspired investors to advance their bets on a U.S. rate hike.

Five-year bond yields increased to a February 2020 high, with short-dated U.S. Treasury yields going higher. Investors increase bets that might force U.S. policymakers to raise interest rates in the near future. 

The dollar index firmed 0.2% to 95.28 against a basket of its peers, marking its highest level since the beginning of 2020. This week’s push from the greenback to higher has seen it break over a two-month trading range, with analysts forecasting more earnings.

Mizuho strategists said that they don’t think this is the end of this motility. They expect the U.S. dollar to remain strong at the beginning of 2022 as they forecast going into the first half of 2022 with some changes. For example, strategists expect the Fed’s taper to come to a conclusion, while a rising rate hike will offer support for the dollar in this time.

The refilled strength in the dollar has added new life in the sinking currency volatility markets as traders struggled to buy options to protect themselves against additional dollar strength. A currency volatility index beat its fresh 6-month high.

Overview

Data published on Wednesday revealed a broad-based increase in U.S. customer prices last month. It has risen at the fastest annual rate since the beginning of 1990. This situation called into question the Fed’s explanation that price pressures will be temporary. It also fuelled speculation that policymakers would raise interest rates sooner than earlier estimated. Markets now price the first-rate hike by the end of July and a high probability of another increase by November. CME data assign a 50% chance of a rate hike compared to less than 35% a month earlier.

The euro moved back to a 16-month low at $1.1437, and sterling fell to $1.3356, marking its weakest level in 2021.

Investors have become more bearish on the possibility for the single currency as the European Central Bank seems unpromising to change its highly dovish policy settings in the nearest quarter against a backdrop of economic slowdown.

The risk-sensitive Australian dollar dropped as low as $0.7278 for the first time in more than 40 days, while in crypto, bitcoin traded around $65,000, from a record $69,000.

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