Dollar holds near 10-month high as Treasury yields rise, Yen nears intervention zone

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27th September 2023 – (New York) The dollar remained close to a 10-month high against major currencies on Wednesday, buoyed by elevated Treasury yields and the expectation of higher U.S. interest rates. Meanwhile, the Japanese yen approached a critical intervention zone.

In early Asian trading, sterling dipped to a fresh six-month low of $1.2145, succumbing to pressure from a stronger greenback. It was on track for a quarterly decline of over 4%, marking its worst performance in a year.

The U.S. dollar index stood at 106.20, having reached a 10-month peak of 106.26 in the previous session. The euro struggled near its six-month low, trading at $1.0569.

Tina Teng, market analyst at CMC Markets, commented, “The U.S. dollar is stickier to the upside than the downside. It’s been a shock for markets since last week because the Federal Reserve’s rhetoric was more hawkish than expected… I think it’s more likely they would hike rates for one more time.”

Recent statements from Fed officials have indicated the potential need for further interest rate hikes, following the central bank’s decision to maintain rates last week while adopting a more hawkish monetary policy stance.

As a result, U.S. Treasury yields have reached multi-year highs as market expectations adjust regarding the peak level of U.S. rates and the duration of tighter monetary conditions.

The benchmark 10-year yield stood at 4.5254%, after hitting a 16-year high of 4.5660% in the previous session. The two-year yield was at 5.0582%.

The yen has faced challenges due to the elevated U.S. yields, with the dollar edging slightly higher to 149.01 yen after hitting an 11-month low of 149.185 yen on Tuesday.

The dollar/yen pair is highly sensitive to fluctuations in long-term U.S. Treasury yields, particularly regarding the 10-year maturity.

The yen’s gradual decline towards the psychologically significant level of 150 yen per dollar has put traders on alert for any signs of intervention from Japanese authorities, who have recently increased their warnings against the yen’s depreciation. Last year, Japanese authorities intervened in the foreign exchange market when the yen breached the 150 zone.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, stated, “The fundamental upside pressure on dollar/yen from bond yields is simply too great to ignore… Even if there were intervention, it won’t drive dollar/yen down permanently unless bond yields start to retreat in earnest too.”

Elsewhere, the Australian dollar slipped 0.04% to $0.6395 ahead of the release of Australian inflation data later on Wednesday. The New Zealand dollar, on the other hand, rose 0.06% to $0.5948.