The U.S. dollar fell in early European trade on Tuesday as risk sentiment rose, but sterling clung to recent gains after the U.K. government’s policy reversal.
At 03:05 E.T. (07:05 GMT), the Dollar Index, which compares the dollar value to a basket of six other currencies, fell 0.5% to 111.145, setting a two-week low. Hence, traders are beginning to wonder whether the Fed may need to alter the timing of its rate increases in light of the U.S. and global economic slowdown. This led to a sharp increase in government bond prices during the last week, driving benchmark Treasury rates lower on the yield curve, a pattern that persisted on Tuesday.
Will The Dollar Rise Despite Disappointing Yields?
The yield on the 10-year Treasury is at 3.60%, down five basis points from Monday’s closing. This is more susceptible to expectations of Fed action, which was down seven basis points at 4.03%.
Goldman Sachs nevertheless continues to predict that the dollar will increase. The investment bank’s experts stated in a study that they still believe that the dollar would rise in the future, even though values have started to diverge from the macro circumstances. Given the Fed’s turn toward aggressive measures, a further dollar gain of 5% to 7% seems feasible.
The GBP/USD exchange rate climbed 0.5% to $1.1375 due to the British government’s decision to revisit the concept of abolishing the highest income tax rate. The new finance minister, Kwasi Kwarteng, also said he would release his fiscal statement. He will probably recommend spending reductions to lower the government’s debt to calm the markets.
Despite “a major repricing” in the British bond market, the additional 62B pounds ($69B) of debt issued should be readily absorbed, according to the head of the U.K. Debt Management Office on Monday.
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