As the Fed remains on pause, the dollar tracks lower Treasury yields

2 Nov 2023 , 09:47 AM

Following a decline in US Treasury yields, the dollar had a broad decline on Thursday as investors became increasingly certain that the Federal Reserve had completed its aggressive cycle of rate hikes.

As was largely anticipated, the Fed kept interest rates unchanged on Wednesday while officials struggled to decide whether financial conditions might be tight enough to contain inflation.

Fed Chair Jerome Powell did concede, though, that recent increases in Treasury bond yields, house mortgage rates, and other financing costs, driven by the market, may have their own effects on the economy if they continue.

The judgement improved mood on Wall Street, which carried over into Asia and gave the risk-averse Australian and New Zealand dollars a little rise.

The Kiwi increased by more than 0.5% to reach a two-week high of $0.58825, while the Aussie increased by 0.5% to a three-week high of $0.6426.

Early in Asia trade, the dollar and US Treasury rates both saw significant declines, reaching multi-week lows. 

The benchmark 10-year yield dropped to a more than two-week low of 4.7070% on Thursday, while the two-year U.S. Treasury yield, which usually indicates expectations for near-term interest rates, plunged to a nearly two-month low of 4.9250%.

The euro gained 0.18% against the dollar to $1.0589.

At 106.34, the US dollar index decreased by 0.11%.

The fact that U.S. manufacturing shrank rapidly in October gave traders even more reason to believe that rates may have peaked, even as other data indicated a healthy labour market, which suggests the Fed will likely retain rates at their current tight levels for some time to come.

According to the CME FedWatch tool, market pricing indicates a nearly 15% likelihood that the Fed might start reducing rates as early as next March, up from a roughly 10% chance one week ago.

The yen found some relief from the dollar’s decline, but it was still worth less than 150 per dollar.

Following the Bank of Japan’s (BOJ) monetary policy announcement earlier in the week, the value of the Japanese yen dropped to a one-year low of 151.74 per dollar. As of right now, it is trading at 150.44 per dollar.

The central bank’s piecemeal adjustment to its divisive bond yield control policy, which caused Japan’s bond market and currency to respond in divergence, left investors still trying to grasp the ramifications.

Ahead of the Bank of England’s rate announcement later on Thursday, when it is anticipated that the central bank would maintain rates on hold, sterling increased by 0.35% to $1.2192 in other trading.

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