Daily Market Pulse

The dollar surges with the treasury yields

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.56% higher and continues to trade near that level with tepid gains/losses. The dollar index remained defensive on Tuesday, after a recovery rally in the previous session, bolstered by a rise in Treasury rates as traders bet on an early Federal Reserve interest rate increase despite surging Covid cases. The benchmark 10-year U.S. yield jumped nearly 8% on Monday to 1.6% as the Fed is expected to begin raising interest rates as early as March, amid a robust U.S. economic rebound and surging inflation, with the Fed-preferred PCE index accelerating at its fastest rate since 1982 in November, at 5.7%. Elsewhere, U.S. market futures remained flat on Tuesday after Wall Street indices started 2022 on a high note, with the Dow and S&P 500 closing at record highs, posting 0.68% and 0.64% respectively. Following that, Market participants will be looking out for ISM manufacturing PMI data, expected at 60.2, to drive the dollar prices further.


The Euro closed 0.52% lower against the U.S. followed by recovering its momentum modestly on Tuesday morning. This comes after the Euro dropped dramatically in the second part of Monday's session, the most since mid December, owing to the Dollar's comeback, which was aided by rising US Treasury bond yields. Meanwhile, talks of tax relief from Germany in 2023, as well as French aid to enterprises affected by the pandemic, push European yields but fail to entice Euro buyers. Furthermore, Germany's retail sales increased by 0.6% month on month in November, compared to -0.5% projected, while the bloc's retail sales fell by -2.9% year on year in November, compared to -3.3%  in October. However, this data did not provide the currency with any major momentum. Looking ahead, traders will view US data releases and broader market sentiments as drivers of further Euro price changes. 


The Sterling closed 0.36% lower after a sharp decline during Monday’s second half session, although it regained momentum when heading into the European morning session on Tuesday. Stronger US Treasury yields drove the British pound down from a two-month high the day before, while coronavirus worries in the UK and Brexit problems added further pressure to the currency. Additionally, a surge in money market bets on the Fed's three rate hikes in 2022, as well as greater U.S. inflation expectations, put additional downward pressure on Sterling prices. In the meantime, the currency's fall remains restricted, as the manufacturing PMI in the United Kingdom was revised marginally higher on Tuesday. The IHS Markit Manufacturing PMI was revised to 57.9 in December 2021 from a preliminary of 57.6, indicating ongoing expansion in manufacturing output, new orders, and employment. Elsewhere, on Tuesday, the first trading session of the new year, the FTSE 100 index rose more than 1% to trade at new highs since February 2020, as investors rushed to buy on fear of losing out after its European counterparts had a solid start to the year on Monday. Moving on, Brexit headlines and Coronavirus news will provide fresh momentum to Sterling. 


The Japanese Yen closed 0.21% lower and continues to grind further on Tuesday’s European trading session. The Japanese yen fell to a 5-year low against the US dollar on Tuesday, as speculators increased their bets on an early Federal Reserve interest rate rise. This comes as investors remain upbeat about indicators that the Omicron variety may be less severe than anticipated and would not derail the economic recovery. Furthermore, a dramatic increase in U.S. Treasury bond rates overnight, as well as a recovery of U.S. dollar strength, drove down the Yen. Elsewhere, the Nikkei 225 Index rose 1.77% on Tuesday, while the wider Topix Index rose 1.94%, both indexes setting new one-month highs after a strong overnight session on Wall Street. Moving forward, traders will continue to draw cues from U.S. data release in order to seize any short-term trading opportunities around the Yen. 


The Loonie closed 0.85% lower against the greenback before gaining modest momentum on Tuesday’s European trading session. The Loonie dipped yesterday as US treasury bond yields rose sharply, however, today's rise is fueled by higher crude oil prices. Despite recently falling below the USD 96 per barrel, the West Texas Intermediate is up 0.15% intraday for the second day in a row. As a result, the black gold boosted cautious optimism in the markets ahead of the OPEC (Organization of the Petroleum Exporting Countries) meeting. Furthermore, concerns about the South African covid version and a quicker rate rise by the U.S. Federal Reserve continue to weigh on Loonie. Following that, the Canadian Markit Manufacturing PMI for December, which is expected at 57.5 as well as the OPEC meeting, will be closely watched in order to move the Loonie prices further.


The Mexican peso finished marginally lower against the U.S. dollar and continued its downtrend modestly during the European trading session. The currency  fell more than 3% against the U.S. dollar in 2021, owing to a combination of risk-off movements caused by the outbreak of two new Covid-19 strains (Delta and Omicron), as well as a global rise in inflation, which prompted major central banks to adopt a hawkish policy stance, effectively ending their pandemic-era stimulus. Meanwhile, the Central bank of Mexico (Banxico) has increased borrowing charges by 150 basis points since June to the current level of 5.5% percent, however, it is inadequate to attract investors as the clouded outlook continues to weigh on the currency's appeal. In other news, the IHS Markit Mexico Manufacturing PMI remained constant in December 2021 at 49.4, indicating a minor worsening in the sector's health. The most recent estimate also indicated that manufacturing activity had contracted for the 22nd consecutive month, as production, new orders, and employment all declined at higher rates.


The Chinese market remained closed on Monday. On Tuesday, the offshore yuan eased slightly against the US dollar as the yield differential between China and the US narrowed, raising market fears about future capital outflows. The yield difference between Chinese and US 10-year government bonds dropped to its lowest level since mid-2019, owing mostly to a rise in U.S. Treasury rates as investors increased their bets on an early Federal Reserve rate hike. Furthermore, the People's Bank of China (PBOC) fixed the midpoint rate at a two-week low and 37 pips lower than the previous fix. In other news, the Shanghai Composite declined 0.2% and the Shenzhen Component sank 0.44% on Tuesday, led down by new energy businesses as investors took gains on 2021's highest performing group. 


The Brazilian Real fell sharply and closed 1.83% lower against the greenback on Monday. This comes as the dollar rebounds on the first trading day of the year, with the market's attention focused on the progress of the Omicron variant and the news that President Jair Bolsonaro has been hospitalized with an intestinal blockage. Meanwhile, financial market experts have cut their forecast for the growth of the Gross Domestic Product (GDP) in 2022. The forecast for the year's economic growth has been reduced from 0.42% to 0.36%. Inflation in 2022 is expected to be 5.03%, which is above the year's cap set under the target system. The Selic, the economy's basic interest rate, was likewise kept at 11.50% per year until the end of 2022. Furthermore, despite recent budgetary data improvements, the biggest weakness on this front is the drive for more permanent expenditure, which tends to be intensified during an election year.


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