Daily Market Pulse

Dollar revives as treasury yield rises

7 minute read


The U.S. dollar capitalized on safe-haven flows on Tuesday and closed 0.32% higher, ending a three-day losing streak. The benchmark 10-year U.S. Treasury bond yield continues to rise, supporting the greenback early Wednesday as market sentiment remains cautious. This week, U.S. Treasury yields have risen after Fed Governor Christopher Waller stated that the central bank should be prepared to hike interest rates by 50 basis points at each meeting from now on until inflation is significantly reduced. Also, in a meeting on Tuesday, President Joe Biden promised Fed Chair Jerome Powell that he will give the central bank the flexibility and independence to address inflation as it sees fit. Reflecting the cautious sentiment, U.S. stock index futures struggled to find direction this morning amid debates on interest rates and inflation. Way ahead, the ISM Manufacturing PMI for May will be watched later in the day for fresh impetus.


The common currency fell 0.42% on Tuesday amid widespread dollar strength before solidifying its losses on Wednesday morning. Despite falling from a five-week high on Tuesday, the Euro closed on a high note in May. Meanwhile, a slew of inflation reports from the Eurozone, Germany, France, Italy, and Spain exceeded market forecasts, fueling speculation that the European Central Bank (ECB) may need to hike interest rates more quickly. In addition, annual inflation in the Eurozone rose to 8.1% in May, up from 7.4% in April and beyond market estimates of 7.7%. This is higher than the ECB's target of 2% and indicates that price pressures in Europe are still elevated and have not peaked, bolstering the case for the ECB to begin raising borrowing costs. Elsewhere, In Europe, the Stoxx 600 Index gave up early gains as investors weighed cheaper valuations against the record rise in eurozone consumer prices published Tuesday.


The pound sterling makes modest daily gains in the European morning after falling 0.40% on Tuesday as the U.S. dollar strengthened. Meanwhile, the Nationwide House Price Index in the United Kingdom gained 11.2% year on year in May 2022, following a 12.1% increase the previous month and exceeding market projections of a 10.5% increase. The average UK house price has risen to a new record high of £269,914. In addition, according to a Confederation of British Industry study, businesses foresee little growth over the next three months, marking the gloomiest outlook since February 2021. Furthermore, the Bank of England warned in May that the economy will be close to the recession by the end of the year when inflation is expected to approach double digits. Aside from that, the FTSE 100 traded towards the bottom of the range on Wednesday, following five consecutive sessions of gains, as investors remain cautious about the British economy while keeping an eye on corporate updates.


The Japanese Yen retreated 0.85% against the greenback yesterday. On Wednesday, the yen continued to weaken against the U.S. dollar, hitting its lowest level in two weeks as the dollar recovered from renewed inflation concerns and a broader risk-off mood. In doing so, the yen traded near a twenty-year low, set in early May, as Japanese policymakers dismissed hopes that the government would aid sustain a swiftly declining currency. In April, the Bank of Japan doubled down on its enormous stimulus program and reaffirmed its commitment to its ultra-low yield policy, saying it will offer to buy an unlimited quantity of 10-year government bonds every market day to preserve an implicit 0.25% yield cap around its zero objectives. This underlines the growing policy divide between Japan and the United States and keeps the yen under pressure. 


The Canadian currency rose to its highest level in almost a month against the U.S. dollar yesterday, closing 0.06% higher, but lost its ground this morning amid a risk-off market mood. The rising oil price and the Bank of Canada's hawkish stance acted as a tailwind for the Loonie. Meanwhile, Canada's GDP increased by 0.8% quarter on quarter in the first three months of 2022, the slowest pace in three quarters, mainly to a 2.4% dip in overseas export volumes, primarily of energy items. With that said, market participants expect Canada's central bank to raise interest rates by half a percentage point for the second time today to curb runaway inflation. Nevertheless, investors are afraid that such a strong tightening could harm economic development, as recent data suggest that the economy grew slower than predicted in the first quarter.


The Mexican peso declined 0.59% against the U.S. dollar yesterday, signaling the end of risk flow for the time being. There is a significant level of volatility surrounding the Mexican currency about its U.S. counterpart. Meanwhile, economists believe that the Mexican peso would be supported in the short run by a hawkish Bank of Mexico. Furthermore, given the near-term high inflation prints and the strong belief of most board members to quicken the hiking pace, analysts now expect Banxico to raise the policy rate by 75 basis points to 7.75% at its June meeting. In other news, the Mexican jobless rate fell to 3.0% in April 2022, the lowest since the pandemic began in March 2020, from 4.7% the previous month.


The Chinese Yuan closed 0.02% lower against the greenback in the previous session. The yuan sank against the U.S. dollar on Wednesday, facing pressure from a strengthening dollar and a wider risk-off mood, despite signs of improvement in Chinese manufacturing activity. Investors were also looking for a market reaction after Shanghai removed a two-month lockout on Wednesday, as well as evaluating China's latest stimulus measures to help stabilize the economy. Meanwhile, on Tuesday, the State Council announced a package of 33 measures covering fiscal, financial, investment, and industrial policies to help the country's pandemic-ravaged economy recover. However, analysts predict that the Chinese economy would decrease in the second quarter and that the recovery will be a long and grinding process reliant on Covid developments, with consumers and companies unlikely to regain confidence instantly.


The Brazilian currency showed a strong rally at the beginning of Tuesday's session, closing 0.56% higher against the U.S. dollar.  The movement was encouraged by the comments by the president of the Central Bank of Brazil (BCB), Campos Neto, who stated that the monetary authority will do whatever it takes to achieve the inflation target. However, he also highlighted that the BCB will consider the impact of the Selic on economic activity. Meanwhile, the Ministry of Mines and Energy formally asked the Ministry of Economy to include the oil-state-run Petrobras on the list of studies for possible privatization, amid the skyrocketing fuel prices and criticism of the company's pricing policy. Elsewhere, BCB´s workers continue with their strike for a wage hike, delaying economic data release ahead of a key monetary policy meeting this month. 


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