The dollar was supported by rising U.S. interest rates and low-yielding currencies such as the Chinese yuan and Japanese yen were hit on Tuesday, hitting their lowest levels since 1986.
Yields on 10-year Treasury notes rose nearly 14 basis points to 4.479% overnight, with analysts attributing the move to expectations of a Donald Trump victory as president and higher tariffs and government borrowing. The yield was at 4.443% during Asian trading hours on Tuesday.
While the dollar rose, the euro resumed some of its small rally as the first round of the French election turned out more or less in line with polls. The single currency was down 0.11% at $1.07287.
“Trump’s better performance (in the debate) compared to President Joe Biden has reinforced expectations that inflation could accelerate, yield curves could steepen further and the dollar could continue to trade at a premium,” said Christopher Wong, currency strategist at OCBC.
The yen fell to 161.745 per dollar on Tuesday, its lowest level in nearly 38 years, extending a slide driven mainly by the wide interest rate gap between the United States and Japan.
Japan’s finance minister said Tuesday that authorities were monitoring sharp moves in the foreign exchange market but had not given a clear warning about intervention.
The yen also fell in cross-market trading, with yen bears worried that the dollar/yen pair could face intervention by Japanese authorities.
Against the euro, the yen hit an all-time low of 173.67 on Monday and moved closer to that level on Tuesday, while against the Australian dollar, the yen was close to a 33-year low as the carry trade remained attractive.
“All eyes are now on Friday night’s US non-farm payrolls report, with Japanese currency officials desperately hoping it shows signs of a sharp slowdown in the labor market to ease pressure on themselves and the battered yen,” said Tony Sycamore, market analyst at IG.
As for bonds, the spread between US and Japanese rates was 340 basis points at 10 years and almost 440 basis points at 2 years.
The Chinese yuan, which hit a seven-month low against the dollar last week and has been virtually unchanged since, is under similar pressure, with U.S. 10-year yields more than 220 basis points higher than Chinese government bond yields.
Strong manufacturing data from China and the central bank’s announcement that it would borrow bonds – likely to sell them and stabilize falling yields, traders said – gave the currency only a brief boost on Monday.
It was at 7.3043 in offshore trading on Tuesday, a hair’s breadth away from its June low. Its onshore counterpart, was 0.04% lower at 7.2712 per dollar.
The dollar index, which measures the U.S. unit against six rivals, was at 105.93, with the spotlight on opening day jobs data due later in the day and comments from Federal Reserve Chairman Jerome Powell when he takes the stage at the ECB forum in Portugal.
The New Zealand dollar slipped 0.36% to $0.6053, testing support at its 200-day moving average. The pound was down 0.14% at $1.2633.
The Australian dollar fell 0.3% to $0.66405 as traders factored in the central bank minutes, which showed there was much discussion about whether policy was tight enough to ensure inflation slowed as desired.
Swap market prices imply a one in three chance of a rate hike as early as next month.
“We know it’s been discussed, the question is what’s the trigger,” said Rob Carnell, an economist at ING. “We’re leaning towards a hike at the August meeting.
