On Tuesday, the dollar touched a one-year high on hopes that the United States Federal Reserve will announce a tapering of the bond-buying program next month. Hence, investors fled to the safe-haven currency in response to rising energy costs.
On the two-year Treasury note in the United States, Yields rose to their highest level in more than 18 months as investors liquidated US paper. They feared that rising oil prices would feed inflation and pressure the Fed to act sooner than expected.
“Treasury rates are the emphasis right now,” said Joseph Trevisani. The credit markets anticipate the taper beginning, I believe, in November.” Investors will be watching the Consumer Price Index data in the United States on Wednesday and retail sales data on Friday. They will be waiting for more signals when the Fed may begin to reduce stimulus.
“The data is going to be massive,” said Joe Manimbo, senior market analyst.
These figures will provide insight into the inflation picture and the amount to which third-quarter growth is expected to have weakened. So, suppose we get more hot inflation data tomorrow. In that case, it will tend to cement tapering this year and may cause the market to fine-tune expectations about when interest rates will be lifted. The dollar index compares the US dollar to a basket of foreign currencies. It reached 94.563, its highest level since late September 2020.
The dollar gained momentum versus the euro as well
According to a monthly market mood poll conducted by Deutsche Bank (DE: DBKGn) this month, most respondents expect US Treasury rates to rise from present levels.
The dollar also gained momentum versus the euro. Rising energy prices fuelled fears that inflation would hamper economic growth. The euro fell 0.23 per cent to $1.1525, its lowest level since July 2020. Germany’s ZEW economic sentiment barometer fell for the sixth month in a row, the latest in a line of measures indicating supply bottlenecks strangling recovery in Europe’s largest economy.
The Australian dollar, which is related to commodities, was up 0.16 per cent at $0.7357.
Bitcoin was down 3.02 per cent at $55,750 in the cryptocurrency market. Ether, the world’s second most valuable cryptocurrency, fell 1.38 per cent to $3,495.
Investors dumped the Japanese yen against the dollar as US yields rose. This resulted in the Japanese currency’s second-largest daily decline on Monday. As Treasury yields rose further on Tuesday, the dollar touched a three-year high vs the yen. Yen had fallen 4% in three weeks versus the greenback. The primary driver of the increase is the continued rise in US Treasury yields. So it’s a relatively basic narrative of a widening rates disparity contributing to the appeal of the carry trade.