US Dollar dips as as 10-year yields back away from highs

The US Dollar (USD) fell against the euro and yen Thursday as the U.S. 10-year yield backed away from the 5% level it neared, before remarks by Federal Reserve Chair Jerome Powell at a discussion on the economy.

Higher Treasury yields have increased the relative attractiveness of the U.S. currency since mid-July, with benchmark 10-year yields earlier on Thursday hitting a 16-year high of 4.983%.

But the rally in the greenback has largely stalled and the currency has consolidated since the index hit a 10-month high on Oct. 3.

“The focus has been on the Treasuries … and most of the focus and the volatility has been in longer-term yield, which tend to have less of a direct impact on FX markets than the front-end yields typically,” said Vassili Serebriakov, an FX strategist at UBS in New York.

“It’s to some extent the question of are long-term yields rising because of the stronger growth outlook in the U.S., or is there also an element of supply impact and concerns over longer-term fiscal policy?” he added. “I think that’s maybe why the impact on FX is a little bit less straightforward.”

The rally in the greenback is also seen as stretched, with the index having risen by 6.8% since mid-July.

“Dollar longs are already quite significant and maybe preventing the dollar from rallying further at this point,” Serebriakov said.

The comments by Powell on Thursday will be watched for any new clues on U.S. interest rate policy. The Fed is expected to hold rates higher for longer as it battles inflation that continues to run above its 2% annual target and it may also raise them again depending on how the economy fares in the coming months.

Fed funds futures traders are pricing in a 39% probability the Fed will raise rates again by December, but see only a 6% chance of a hike in November, according to the CME Group’s FedWatch Tool.

The dollar index was last down 0.24% on the day at 106.28.

Concerns over the conflict between Hamas and Israel is also a factor that may increase safe haven demand for the U.S. currency.

The euro gained 0.37% to $1.0577.

Risk sensitive currencies including the Australian and New Zealand dollars were among the worst performers on Thursday.

The Aussie fell 0.21% to $0.6323 while the kiwi dropped 0.29% to $0.5838. The New Zealand currency earlier fell to $0.5816, the lowest since Nov. 4.

“Over the last day or so, the spike higher in yields has hurt risk sentiment in markets, we saw a sell off overnight in global equity markets and that risk-off trading is driving FX markets particularly in the high-beta commodity currencies,” said Lee Hardman, senior currency analyst at MUFG.

The Japanese yen gained slightly on the day but remained near the 150 level against the U.S. dollar, where traders see a risk that Japanese officials could intervene to shore up the currency. It was last at 149.78.

Currency bid prices at 10:00AM (1400 GMT)