Daily Market Pulse

The dollar rises with treasury yields

8 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.14% lower, followed by it regaining its uptrend on Thursday morning. The dollar fell against its major rivals in the first part of the day on Wednesday, although it reversed its course in the late American session due to rising U.S. Treasury bond rates. The U.S. Dollar Index is continuing to rise in the early European session on Thursday, as investors assess FOMC's December meeting decision. Fed policymakers said the "extremely tight" labour market in the United States may support raising rates sooner. Meanwhile, the market was quick to price in a roughly 80% chance of a 25 bps Fed hike by March 2022. Additionally, the benchmark 10-year Treasury yields rose for the fifth straight session on Thursday to 1.73%, the highest level since March 31st, 2021. In other news, the ADP National Employment Report suggested that private U.S. payrolls increased last month by more than twice of what markets expected at 807K, against expectations of 400k, nurturing upbeat expectations for Friday's non-farm payrolls figures. Moving on, traders will see ISM service PMI figures to direct the dollar prices further. 


The Euro closed 0.24% higher against the U.S. dollar followed by it losing its pace and moving downwards with tepid gains while opening for Thursday's session. The currency’s pessimism resurfaced on Thursday with increased buying pressure on the U.S. dollar, which was intensified after the FOMC Minutes (on Wednesday) revealed a hawkish stance, opening the door to a possible start of the Fed's tightening sooner than expected. Elsewhere, the IHS Markit Eurozone Composite PMI in December 2021 was at 53.3, unchanged from a preliminary estimate of 53.4, and lower than the previous month's final figure of 55.4. The most recent number indicated the slowest rise in private sector activity since March, as services production growth dropped to an eight-month low amid a recurrence of COVID-19 infections, while manufacturing output growth remained moderate owing to supply-related problems.  Coming up, the main events are the announcement of preliminary inflation numbers in Germany for December, followed by Producer Prices in the Eurozone, which is expected at 1.2% for November. 


The Sterling closed 0.20% higher, although it lost its momentum while heading into Thursday’s morning session. The British pound continued the previous day's retracement decline from a near two-month peak and moved down in the early part of Thursday’s trade. A significant change in policymakers' tone on rate hikes continued to support the U.S. dollar, which was seen as a crucial factor undermining the Sterling. Meanwhile, during the early hours of today, the Markit service PMI in the U.K. exceeded expectations posting 53.6 in December, compared to 53.2 expected. However, this is the lowest figure for services activity since February, as pandemic limitations weighed severely in December. In other news, the FTSE 100 fell over 1% on Thursday, after reaching a near two-year high the previous day, and following a worldwide selloff in asset markets on interest rate rise forecasts. Looking ahead, traders will get cues from Omicron-related headlines as well as U.S. data releases to provide fresh momentum for Sterling. 


The Japanese Yen closed 0.04% higher and continued to extend its gains in Thursday’s session. The currency moved higher against the U.S. dollar as Japanese government bond (JGB) rates mirrored a steady climb in the U.S. Treasury yields. On Thursday, the benchmark 10-year JGB yield jumped over 0.11%, reaching levels last seen in April 2021. As a response, the Bank of Japan (BOJ) proposed to infuse significant liquidity into financial markets, with up to JPY 2 trillion in bond purchases, in order to mitigate the effects of increasing long-term interest rates on the economy’s recovery. Meanwhile, the Nikkei 225 Index plummeted 2.88%, while the wider Topix Index sank 2.07% on Thursday, as technology and other growth firms sold down on concerns about the U.S. Federal Reserve's more aggressive monetary tightening. Looking forward, traders will see U.S. data releases and wider market sentiments to provide further direction for the Yen. 


The Loonie closed 0.38% lower followed by it continuing its downtrend as it entered Thursday’s European trading session. The Loonie sustains pressure as a result of higher U.S. Treasury rates and lower prices for Canada's major export commodity, crude oil. During the five-day rise, U.S. 10-year bond rates increased by 2.3 basis points (bps) to 1.73%, touching a nine-month high. The West Texas Intermediate fell 0.15% to $76.66 after hitting its highest level since late November the day before. In other news, the S&P/TSX finished 0.9% on Wednesday, after a large drop on Wall Street and skyrocketing bond yields after the latest FOMC announcement boosted the probability the Fed would tighten monetary policy quicker. Looking ahead, traders will be watching Canada International Merchandise Trade for November, while higher yields and oil price dynamics will influence Loonie values even further. 


The Mexican Peso finished 0.25% lower against the U.S. dollar, although it regained its momentum modestly during the European trading session. The Mexican Peso rose mildly against the U.S. dollar in the first week of January to touch the highest level since early November, as oil prices rose and risk appetite recovered as traders hoped omicron interruptions would not derail the economy. Meanwhile, the Mexican central bank is projected to keep raising interest rates as inflationary pressures remain. In November, inflation reached a 20-year high of 7.37%, significantly over the Bank of Mexico's objective. In other news, Mexico's consumer confidence index fell to 44.5 in December 2021, down from an upwardly revised 28-month high of 46 in November, as consumer sentiment dropped in four of the survey's five key issues. Households were more pessimistic about the country's one-year economic outlook and their own personal financial status in the next year. 


The Chinese Yuan closed 0.13% higher before losing its momentum on Thursday morning. The offshore Yuan fell against the U.S. dollar this morning, weighed down mostly by the Federal Reserve's hawkish stance. U.S. policymakers anticipated faster interest rate rises and discussed quantitative tightening this year to combat stubbornly high inflation. The Fed's aggressive attitude increased U.S. bond yields, harming equities and risk-sensitive currencies. Meanwhile, the People's Bank of China is largely anticipated to maintain monetary easing in order to cushion an economic downturn. This week, the yield difference between Chinese and U.S. 10-year government bonds dropped to its lowest level since mid-2019, as U.S. Treasury rates rose, boosting the prospect of capital outflows and putting pressure on the Yuan. Elsewhere, the Shanghai Composite declined 0.25%, while the Shenzhen Component sank 0.66% on Thursday, with both averages falling for the third day in a row due to worries over China's Covid lockdowns, regulatory risks, and policy uncertainty.


The Brazilian Real closed 0.59% lower against the greenback on Wednesday. The currency suffered a negative close as a result of the publication of minutes from the most recent Federal Reserve meeting. Officials said in the letter that the labor market was "extremely tight," and that the U.S. Federal Reserve may need to not only hike interest rates sooner than planned but also lower its entire asset portfolio, to limit the spiking inflation. Meanwhile, the Brazilian fiscal situation remained on investors' radar, a problem that is expected to dominate investors’ attention in 2022. Sharing the spotlight with this issue in the presidential contest, as the government made room for increased expenditure on population via the PEC dos Precatórios. In other news, the Consumer Prices Index for the City of Sao Paulo in Brazil increased by 0.57% month on month in December 2021, the lowest gain since May and a decrease from a 0.72% increase in November. Finally, after the Fed's meeting, the Ibovespa stock index plunged 2.4%, the most in a month, extending losses for the third straight day in line with its American peers.


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