Dollar rides Treasury yields higher, yen battered

An attendant holds a sample of newly-designed Japanese 10,000 yen banknote, with three-dimensional holographic technology to prevent forgery, for a photograph at the National Printing Bureau Tokyo plant in Tokyo, Japan, on Wednesday, June 28, 2023.

Kiyoshi Ota | Bloomberg | Getty Images

The dollar traded near a 10-month high against its major peers on Wednesday as Treasury yields stayed elevated on the prospect of higher-for-longer U.S. rates, while the yen stumbled towards a closely-watched intervention zone.

Sterling slid to a fresh six-month low of $1.2145 in early Asia trade, coming under pressure against a stronger greenback. It looked set for a quarterly decline of more than 4%, its worst in a year.

The U.S. dollar index last stood at 106.20, having peaked at a 10-month high of 106.26 in the previous session, while the euro languished near Tuesday’s six-month low and last bought $1.0569.

“The U.S. dollar is stickier to the upside than the downside,” said Tina Teng, market analyst at CMC Markets.

“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.”

Fed officials have in recent days flagged the possibility that the central bank would need to raise interest rates further, after it kept rates steady last week but stiffened its hawkish monetary policy stance.

That has sent U.S. Treasury yields scaling multi-year highs as money markets adjust their expectations of where U.S. rates could peak, and for monetary conditions to remain tighter for longer than initially thought.

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

The elevated U.S. yields have spelt trouble for the yen, which edged marginally higher to 149.01 per dollar, after having slipped to a 11-month low of 149.185 on Tuesday.

The dollar/yen pair tends to be extremely sensitive to changes in long-term U.S. Treasury yields, particularly on the 10-year front.

The yen’s slow-but-steady decline to the psychological level of 150 per dollar has kept traders on high alert for any signs of intervention from Japanese authorities, as officials ramp up their rhetoric against the sliding currency.

The 150 zone is seen by financial markets as a red line that would spur Japanese authorities to intervene, like they did last year.

“The fundamental upside pressure (to dollar/yen) from bond yields is simply too great to ignore,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“Even if there were intervention, it won’t drive dollar/yen down permanently unless bond yields start to retreat in earnest too.”

Elsewhere, the Aussie fell 0.04% to $0.6395, ahead of Australian inflation data due later on Wednesday.

The New Zealand dollar rose 0.06% to $0.5948.

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