The U.S. dollar skyrocketed to multi-month highs against the Japanese Yen and the Euro on Friday. During his speech, Federal Reserve Chair Jerome Powell reiterated his stance to keep interest rates low for a long time. He also did not express any concerns about a recent sell-off in bonds.
According to Powell, the sell-off in Treasuries was not disorderly. Furthermore, he stated that it likely wouldn’t push long-term rates so high the agency might have to intervene more forcefully. After that announcement, a sell-off in Treasuries reignited.
Overall, Powell stands on dovish rhetoric. But he repeated that the Federal Reserve is committed to maintaining ultra-easy monetary policy until the global economy is very far along to the road to recovery.
Commonwealth Bank of Australia currency analyst Joseph Capurso stated that markets are taking their cue from the central banks. So, if markets will be on hold for a long time, that means long-term inflation will also be higher. That’s why we see the equity and bond markets sell-off. The forex markets are reacting to the increased volatility in both those markets.
The dollar index surged forward to a three-month high, last trading at 91.672 in the Asian session. It also gained 0.7% on Thursday.
At the same time, the benchmark 10-year Treasury yield climbed up above 1.5%, soaring as high as 1.584% in Asia. It hit a one-year high of 1.614 % last week. Investors are waiting for U.S. fiscal stimulus, adding fuel to expectations of higher inflation. Besides, the accelerating roll-out of coronavirus vaccines also boosts confidence in the country’s economic recovery.
How did the euro and riskier currencies fare?
On Friday, the euro tumbled down by 0.2% to a three-month low of $1.19515. Before that, the currency lost 0.7% overnight.
The greenback jumped to an eight-month high of 108.035 Japanese yen earlier in the session. However, it gave up much of its gains later. Japanese Finance Minister Taro Aso declined to comment on the yen’s tumble when asked how the decrease would affect Japan’s economy.
Riskier currencies, such as the Australian and New Zealand dollars, plummeted down along with stocks as trader sentiment again turned sour.
Capurso at CBA noted that once the bond route comes to an end and the volatility fades away, the commodity currencies (the Aussie and the kiwi) will be able to rebound because commodity prices aren’t declining.
The Aussie tumbled down by 0.3% to $0.7705 after losing 0.7% on Thursday. The kiwi also fell by 0.2%, adding to its 0.8% decline overnight.