Dollar set for biggest weekly rise in 5 months as yields rise
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[November 12, 2021] By
Saikat Chatterjee
LONDON (Reuters) - The U.S. dollar edged
higher on Friday and is on track for its biggest weekly rise in five
months since a surprisingly strong U.S. inflation print shocked markets
and prompted investors to advance their bets on a U.S rate hike to as
early as mid-2022.
With short-dated U.S. Treasury yields edging higher -- five-year bond
yields rose to a February 2020 high -- investors have ramped up bets
that U.S. policymakers will be forced to raise interest rates sooner
than later. [US/]
The rise in short-dated yields has narrowed the spread between 30-year
U.S. Treasury yields and 2-year debt to its narrowest levels in a year.
Against a basket of its rivals, the dollar index firmed 0.1% to 95.27,
its highest level since July 2020. The greenback's push higher this week
has seen it break above a two-month trading range with analysts
predicting more gains.
"We don’t think this is the end of the move and expect the U.S. dollar
to remain strong into the first half of 2022 as we will be going into
the first half of 2022 with the Fed's taper coming to a conclusion and a
looming rate hike will offer support for the dollar in this period,"
Mizuho strategists said.
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The surge in price pressures has pushed inflation-adjusted 30-year U.S.
yields to near its lowest levels on record, BOFA strategists said in a
weekly note.
The renewed strength in the dollar has injected fresh life in the
moribund currency volatility markets as traders have scrambled to buy
options to protect themselves against further dollar strength. A
currency volatility index hit a fresh 6-month high.
Data on Wednesday showed a broad-based rise in U.S. consumer prices last
month at the fastest annual pace since 1990, calling into question the
Fed's contention that price pressures will be "transitory" and fuelling
speculation that policymakers would lift interest rates sooner than
previously thought.
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Four thousand U.S.
dollars are counted out by a banker counting currency at a bank in
Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking
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Markets now price a first rate increase by July and a high likelihood of
another by November. CME data is assigning a 50% probability of a rate
hike by then compared to less than 30% a month earlier.
The euro slipped back to a 16-month low at $1.1436, and sterling dipped
to $1.3354, its weakest level this year.
Investors have become increasingly bearish on the outlook for the single
currency as the European Central Bank appears unlikely to change its
extremely dovish policy settings in the near term against a backdrop of
a slowing economy.
Citigroups' economic surprise indexes for U.S. has far outpaced its
European counterparts signaling more gains for the U.S. dollar versus
the euro.
The risk-sensitive Australian dollar sank as low as $0.7277 for the
first time in more than a month while in cryptocurrencies, bitcoin
traded just south of $65,000, down from a record $69,000 earlier in the
week.
(Reporting by Saikat Chatterjee; Additional reporting by Kevin Buckland
in TOKYO; Editing by)
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