NEW YORK ⸺ The dollar gained for a third straight session on Monday, as traders cut their bearish bets on the greenback to four-month lows amid the recent rise in U.S. Treasury yields and grew cautious ahead of the Federal Reserve’s policy meeting this week.
Aside from the Fed, the Bank of England and the Bank of Japan are also set to meet this week and all three will likely set the tone on where global interest rates are headed.
U.S. Treasury yields, however, were lower on Monday in line with Europe, ahead of these central bank gatherings. Benchmark 10-year Treasury yields traded as high as 1.639% on Monday, close to Friday’s top of 1.642%, a level last seen in February 2020. The yield was last at 1.61%.
“The market is in a holding pattern waiting for the FOMC this week. A big part of that involves questions on whether the Fed is going to talk about the yield curve or whether they’re going to address the rise in long-dated yields,” said Amo Sahota, executive director at Klarity FX in San Francisco.
Gains in the greenback were more pronounced against low-yielding currencies such as the euro and the British pound, while high-yielding currencies like the Australian dollar fared relatively better.
Rising U.S. yields have lifted the greenback 2% so far this year thanks to widening interest rate differentials relative to other major bond markets. The dollar declined more than 4% in the last quarter of 2020.
In afternoon trading, the dollar index, which tracks the U.S. currency against six major peers, was up 0.1% at 91.799. It hit a late November 2020 high of 92.51 last week.
The U.S. currency has been supported by declining bets for its decline, with speculators cutting net short positions to the lowest since mid-November in the week ended March 9.
Rising bond yields will continue to focus minds this week before a Fed meeting at which some analysts expect policymakers to strike an optimistic tone on the U.S. economy.
While there are some expectations that the Fed might try to calm bond markets – yields have risen some 60 basis points since the last Fed meeting – the consensus view is that Fed Chief Jerome Powell will not make changes to policy.
“If the Fed does not address the issue on yields, then the drive toward a stronger dollar will start to gain foothold, which is different from what most people expected at the beginning of the year,” said Klarity’s Sahota.
The dollar rose 0.1% against the yen to 109.15, after earlier climbing to 109.36 yen, the highest since June 2020.
The euro weakened 0.2% to $1.1926 after rising last week for the first time in three weeks as latest data showed hedge funds slashed their net euro positions.
The Australian dollar – viewed widely as a liquid proxy for risk appetite – slipped 0.1% to US$0.7750, extending Friday’s Loss.
Bitcoin, meanwhile, dropped more than 5% after surging to a record high of $61,781.83 over the weekend. It was last down at $56,046.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Catherine Evans, Alexander Smith, Andrea Ricci and Jonathan Oatis; Reuters