The U.S. dollar rallied against major currencies on Tuesday, skyrocketing to a one-year high against the yen. Faster U.S. vaccination rollout, along with plans for a major stimulus package, boosted inflation expectations and Treasury yields, causing the currency’s surge.
Traders flocked to the safe-haven dollar found after digesting the fallout from the plunge of highly leveraged investment fund Archegos Capital.
The dollar index surpassed the 93 mark. It traded at 93.122 at last, hitting its highest level in four months.
Against the Japanese Yen, the greenback climbed up above 110 yen. The currency hadn’t reached such a level since March last year. As a result, the dollar is now on track for the best month since late 2016. The end of Japan’s fiscal year this month is also boosting dollar demand as companies square their books.
According to analysts, the Japanese yen was more vulnerable to a rise in long-term U.S. yields and higher inflation expectations in the U.S. versus Japan.
On Tuesday, U.S. 10-year Treasury yields soared to 14-month highs. The day before, President Joe Biden announced he was ready to outline how he would pay for a $3 trillion to $4 trillion infrastructure plan.
Lee Hardman, the currency economist at MUFG, stated that the USD/JPY pair has the highest correlation amongst G10 currencies with long-term U.S. yields thus far. He expects another fiscal stimulus policy announcement from the Biden administration to support upward pressure on long-term U.S. yields.
How Did the Euro Trade?
The euro declined to $1.17335 on Tuesday, hitting its lowest level since November. Coronavirus cases hiked in France and Germany, dimming the short-term outlook for the European economy. A widening spread between U.S. and German bond yields is also increasing pressure on the single currency.
Traders are waiting for the monthly U.S. non-farm payroll report, which is due at the end of this week. Meanwhile, Federal Reserve policymakers are citing a decline in the labor market for their continued lower-for-longer stance on interest rates.