The U.S. dollar fell against a basket of currencies on Monday, following a retreat in the benchmark U.S. Treasury yield.
The dollar index sat around 105.47 on Monday evening, losing over 0.5 percent in the previous session as U.S. Treasury yields tumbled. The index had risen as high as 106.33 earlier in the session.
The 10-year Treasury yield fell on Monday after briefly hitting 5.021 percent, the highest level since July 2007. This sell-off in government bond markets was driven by the prediction that central banks would keep rates high for longer, an increase in the supply of bonds and widening term premia. It was last seen at 4.8375 percent.
Analysts say the rising yield indicated investors were concerned about a potential economic slowdown due to higher borrowing costs.
“We’re going to see a steeper yield curve, and that’s going to put pressure on long-term rates,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG. “In the next six to nine months, we’ll see a fairly extensive economic slowdown, and that’s what the market’s pricing in.”
Since mid-July, the rise in U.S. Treasury yields has increased the market’s sentiment in the dollar, helping the greenback index rise over six percent.
Barclays analysts were less confident that the U.S. dollar would continue to rise significantly. They cited that long dollar positions are already stretched and that further increases in long-dated yields are unlikely without a change in the Fed’s rate outlook.
Japanese yen surges
The dollar’s decline provided some slight relief for the weakening Japanese yen. The yen reached the sensitive 150 level on Friday and Monday but was last flat against the greenback at 149.58.
However, robust U.S. economic data this week could push the yen back towards the 150 yen per dollar level.
“The yen will be particularly sensitive to hot U.S. data, especially if it causes Treasuries to blow through what’s looking like a key resistance level of 5 percent or so,” said Kyle Rodda, senior financial market analyst at Capital.com.
Traders consider the 150 threshold as a potential trigger for intervention from Japanese authorities.
Meanwhile, the euro was up 0.73 percent. The Canadian dollar gained 0.3 percent against the U.S. dollar—ahead of the Bank of Canada’s interest rate decision on Wednesday.
In the crypto market, Bitcoin surged by up to 14 percent, reaching a 2.5-year high of $34,283. This jump was driven by investors’ optimism regarding the potential introduction of a spot Bitcoin exchange-traded fund (ETF).
Upcoming events
Investors are anticipating fresh U.S. economic data ahead of the Fed’s monetary policy meeting next week. They are also monitoring events like the European Central Bank meeting, U.S. GDP data release and the Fed’s preferred inflation gauge.
“A big week of data with eyes on U.S. GDP on Thursday, plus BoC (Bank of Canada) and ECB (European Central Bank) in the mix, and of course geopolitical risk remaining incredibly elevated is really denting traders’ desire to do much as the week gets underway,” said Michael Brown, market analyst at Trader X in London.
The ECB is scheduled to convene on Thursday. According to a Reuters poll, the ECB is not expected to initiate any easing measures until at least July 2024, despite having concluded its rate hiking cycle. Previously, the bank increased its key interest rates by 25 basis points in September.