Treasury yields kept dollar firmly on front foot as others currencies fall

The euro, pound and yen were all pinned at multi-month lows on Tuesday, with the Japanese currency on the brink of weakening past the psychological 150 per dollar level, as surging U.S. Treasury yields kept the dollar firmly on the front foot.

The euro was steady on the day at $1.0476, around its weakest since early December 2022, after a near-1% plunge on Monday when U.S. manufacturing data came in strong and Federal Reserve officials said monetary policy would need to stay restrictive for "some time".

The combination of that and an agreement to avert a partial U.S. government shutdown sent benchmark Treasury yields to as high as 4.706% on Tuesday, a 16-year peak, in turn driving the dollar higher.

"There are two very powerful things that are supporting the U.S. dollar at the moment, the real rate differential is favourable to the U.S. and the U.S. economy is outperforming," said Samy Chaar, chief economist at Lombard Odier.

Real interest rates, unlike nominal ones, factor in inflation which is falling faster in the United States than in Europe.

Chaar said he also thought there were technical factors driving the sell-off in U.S. Treasuries, possibly capitulation by major investors, as the economic situation, in his view, did not justify yields continuing to rise.

The pound fell to its lowest since March and was last down 0.26% at 1.20565, and traders were focused on the Japanese yen which was flat on the day at 149.89 per dollar, but still around its weakest in nearly a year and just shy of the 150 per dollar level that some see as potentially pushing Japanese authorities to intervene to prop up the currency.

Japanese Finance Minister Shunichi Suzuki said on Tuesday authorities were watching the currency market closely and stood ready to respond, but also said any decision on currency market intervention would be based on volatility, not specific yen levels.

Although Japanese officials have stated "that the government is not watching any particular level ... interventions had previously occurred around 150, signifying official discomfort when the (yen) weakens beyond this point", said Wei Liang Chang, foreign exchange and credit strategist at DBS.

The dollar index, which tracks the unit against six peers, was up 0.13% at 107.16, at its highest since November.

The main data points in the United States this week relate to the labour market. "(Tuesday's) U.S. JOLTS job openings and non-farm payrolls on Friday can be a catalyst to push up U.S. yields and the USD if they surprise to the upside," said Carol Kong, economist and currency strategist at Commonwealth Bank of Australia.

The Australian dollar slipped to an 11-month low of $0.6302, down as much as 0.95% following the Reserve Bank of Australia's (RBA) decision to hold rates, while Russia's rouble weakened past the symbolic threshold of 100 to the dollar before recovering slightly in early trade.

The dollar was up 0.5% against the Swiss franc at 0.9215 at a six month high after Swiss inflation dipped and came in slightly below expectations

 

(Reporting by Brigid Riley in Tokyo and Alun John in London; additional reporting by Kevin Buckland; Editing by Shri Navaratnam , Jamie Freed, Emelia Sithole-Matarise and Sharon Singleton)