The US Dollar made strong gains in Friday’s forex markets boosted by a sharp increase in U.S. bond yields the night before.
The greenback hit a six-month high against the Japanese Yen as well as snapping a six-day losing streak against the British Pound after a surge in U.S. bond yields.
The yield on the benchmark 10-year U.S. Treasury note surpassed the 1.6% level overnight to trade at its highest level in over a year.
Government bonds, and in particular U.S. Treasuries, have taken centre stage in the global markets, after traders aggressively priced in earlier monetary tightening signals by the Federal Reserve.
Both the USD and the JPY are traditional haven currencies. However, the JPY tends to decline when U.S. yields rise, whereas the USD tends to strengthen.
Bond yields have risen so far in 2021 on the back of huge fiscal stimulus during continued US-led ultra-easy monetary policy.
However, a recent rise in inflation-adjusted bond yields has accelerated, indicating increasing consensus that central banks may need to scale back these ultra-loose policies, despite all the dovish talk, most notably the testimony from Federal Reserve Chairman Jerome Powell earlier this week..
Westpac and Nordea Highlight Increased Risk Appetite
Westpac strategists wrote in a client note:
“The fixed income rout is shifting into a more lethal phase for risky assets,”
“It appears to be the case that bond markets are ‘taking on’ the central bankers’ world view, and standing in front of the current momentum is unwise.”
Westpac
Analysts at Nordea stated something similar in a research note, saying:
“Risks are tilted towards a faster rise in yields. History has shown us that exiting from very easy central bank policies can be tricky,”
“While Powell has for now promised that sizable bond purchases will continue, the time to start to tweak that communication may not be that far into the future.”
Nordea
USD Makes Strong Gains
At the time of writing, the EUR/USD is down 0.48%, the USD/JPY up 0.22% and the GBP/USD seeing its first day of losses in six, down 0.67%.
The US Dollar Index which measures the greenback against a basket of weighted currencies is up 0.58%.
