The dollar held at a six-week high on Thursday as an overnight jump in U.S.
Treasury yields on the back of strong data prompted investors to add long bets in the greenback against higher-yielding and emerging market currencies.
Yields on benchmark ten-year U.S. Treasury yields jumped nearly 12 basis points on Wednesday, climbing to 3.23 per cent, its highest levels since mid-2011 after private payrolls data was stronger than forecasts.
The upbeat data on Wednesday followed confident remarks by U.S. Federal Reserve Chairman Jerome Powell who said the Fed may raise interest rates above an estimated “neutral” setting as the “remarkably positive” U.S. economy grows.
The combination of strong data and hawkish comments sent the dollar index =USD up 0.2 per cent to 96.1, its highest since Aug. 20 and nearing a 2018 high of 96.99 hit in mid-August.
“U.S. data this week has been quite strong and the Fed is keeping a hawkish stance, but given the magnitude of long dollar positions in the market, we are cautious of buying the dollar at these levels,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
The Institute for Supply Management’s (ISM) non-manufacturing activity index jumped 3.1 points to 61.6 last month, the highest reading since August 1997 and the ADP National Employment Report showed private payrolls jumped by 230,000 jobs in September, the largest gain since February.
The spike in U.S. yields also pulled the gap between 10-year benchmarks between the United States and Germany to its highest in nearly three decades at 274 basis points and boosted the prospects of more rate hikes from the Fed in 2019 with markets now expecting two rate hikes after one in December.
Emerging market currencies came under pressure from the strong dollar, with the Indian rupee plummeting to a record low despite central bank intervention and the Chinese yuan weakening by 0.1 per cent against the dollar.
The widening selloff in emerging market currencies rippled into the core G10 FX space with the euro coming under pressure despite Italian budget concerns fading into the background.
John Marley, a senior currency consultant at Smart Currency Business, and FX risk-management specialist said the euro might weaken further after falling overnight below a key support level of $1.1530.
The single currency was trading flat at $1.1481 after hitting a six-week low in Asian trading at $1.1463.
Italian bond yields tumbled on Thursday, extending the previous day’s sharp falls, after Italy said it would cut budget deficit targets from 2020 and reduce its debt over the next three years.
The pound was steady at $1.2933 following a dip overnight to a 3-1/2-week low of $1.2925 while the Australian dollar extended overnight losses, slipping to a three-week trough of $0.7091.