Dollar rises in early trade due to hawkish Fed expectations

19 May 2023 , 08:06 AM

In response to rising U.S. Treasury yields, the dollar strengthened against the yen on Friday, approaching a six-month high, as hopes for successful debt ceiling negotiations in Washington increased expectations for longer-term increases in interest rates.

Earlier this week, President Joe Biden and the top Republican in Congress Kevin McCarthy reaffirmed their commitment to reaching a swift agreement to raise the government’s $31.4 trillion debt ceiling. They hoped to do so after Biden returns from the Group of Seven meeting in Japan on Sunday.

The revelation reduced market expectations of where U.S. interest rates may go and helped allay concerns about a historic and economically disastrous American debt default.

The number of Americans submitting new jobless benefit claims fell less than anticipated last week, statistics showing a still-tight labour market, which increased anticipation that the Federal Reserve could raise interest rates again next month in an effort to reign in inflation.

On Thursday, two Fed officials said that the U.S. inflation does not appear to be slowing down quickly enough for the Fed to halt its program of interest rate hikes.

Early on Friday in Asia, the dollar maintained its upward trend and last traded at 138.40 yen, having reached a nearly six-month high of 138.75 yen the previous day.

The dollar was aiming for its biggest weekly gain since February—a gain of about 2% against the yen.

The U.S. dollar index was last trading at 103.46, just shy of Thursday’s two-month high of 103.63, and it was on pace to post its second straight week of gains of over 0.7%.

The extent of rate reduction anticipated later this year has also been scaled back, with rates projected to be slightly around 4.6% by December.

On the strength of the aggressive Fed repricing and in the midst of an improvement in risk sentiment, U.S. Treasury rates have increased. When bond prices decline, yields increase.

The two-year Treasury yield, which usually fluctuates in line with forecasts for interest rates, was recently at 4.2581%, moving up from a low of 3.964% at the beginning of the week.

The benchmark 10-year yield increased by over 20 bps this week and was last seen at 3.6476%.

The euro gained 0.06% against other currencies to $1.0777, but it was still hovering around the session’s nearly two-month low of $1.07625.

After losing around 0.6% on Thursday, the pound rose 0.05% to $1.2415.

The Australian dollar increased by 0.17% to $0.6633 after declining on Thursday due to a stronger dollar and statistics suggesting an unexpected decline in employment in Australia in April.

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