The dollar inched up on Friday morning in Asia, boosted by a surge in the U.S. 10-year Treasury yield, which had briefly hit five percent on Thursday.
As of writing, the dollar index is at 106.28 after slipping to 106.24. According to Reuters, it was on track for a weekly loss.
On Thursday, the currency dropped following Federal Reserve Chair Jerome Powell’s “dovish” speech. Investors had expected the Fed to keep interest rates at their current levels for a while and even factor in a slight chance of a further hike.
According to the CME Group’s FedWatch Tool, Fed funds futures now imply a 30 percent probability of a rate hike in December, down from 39 percent before Powell’s comments. The market predicts no rate hike in November.
The expectation has driven the 10-year Treasury yield up by 35 basis points this week, from 4.9813 percent to a 16-year high of 4.996 percent on Thursday.
“The move up has been driven by the Fed leaving the market as a price-insensitive buyer. Foreign demand has also waned. Combined with surprisingly large issuance from the deficit, it’s a classic supply and demand effect,” said Brian Jacobsen, chief economist at Annex Wealth Management.
The dollar remains strong against the yen, trading at 149.84, approaching the key level of 150 per dollar. If the yen falls below 150, some traders expect the Japanese authorities to intervene, as they did last year.
Sterling also fell by 0.08 percent to $1.21285 but remained above its two-week low of $1.2093 it reached on Thursday. The euro eased 0.04 percent to $1.05755.
The Australian dollar lost 0.26 percent to trade at $0.6312, while the New Zealand dollar edged lower to $0.5832 after sliding to an 11-month low of $0.5816 on Thursday.
Powell: Downward pressure on economy
Fed Chair Powell spoke at the Economic Club of New York meeting on Thursday. It would be his last insight before Fed officials go into blackout ahead of the Fed meeting on October 31 - November 1.
“Tight policy is putting downward pressure on economic activity and inflation,” Powell said.
Powell highlighted that the strong economy and tight labor market may require stricter borrowing conditions to control inflation. However, the rising bond yields are already slowing the economy, potentially curbing inflation and reducing the need for additional Fed rate hikes.
Powell’s remarks were carefully balanced, acknowledging the economy’s strength and the potential need for further rate hikes while also warning of emerging risks and the need for caution.
Since the Fed began raising interest rates in March 2022, the unemployment rate has remained low, below the level most Fed officials consider consistent with price stability. At the same time, job growth has unexpectedly accelerated, and retail sales have defied expectations of a slowdown.
The number of Americans who applied for unemployment benefits fell to a nine-month low of 198,000 in the week ended on October 14, defying expectations that layoffs would rise as higher interest rates tighten the economy.
“A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” said Powell.
These “uncertainties” include new geopolitical risks due to the Middle East conflict.
Economic growth has generally exceeded the Fed’s estimate of the economy’s long-term potential growth rate, with inflation remaining at 3.7 percent throughout September. The Fed has said it is “proceeding carefully” in assessing the need for further hikes.