Dollar rally runs out of puff as yields ease

Cornelia Mascio
Gennaio 13, 2021

The US dollar fell on Tuesday and pulled back from its 3-week high while on track for its first loss in 5 days due to profit-taking, but today's loss are curbed by the high yields of the US 10-year Treasury bonds.

The Australian and New Zealand dollars rose from one-week lows, lifting the Aussie above 77 cents again to sit at US$0.7758 and the kiwi over 72 cents to trade at $0.7220.

Benchmark 10-year Treasury yields declined after recording 10-month highs, it dragged the dollar low. "The new (virus) strain reminds us of the fact that 2021 may not be materially different from 2020 if the world doesn't get the vaccine fast enough", said Howie Lee, an economist at OCBC Bank. "But with United States asset markets in the driving seat, with equities setting the scene for risk appetite and U.S. bonds leading the way in interest rate markets, it's worth asking if we can take dollar weakness for granted".

Spot gold fell as much as 1.7 per cent to US$1,816.53 per ounce, its lowest since Dec 2, and was down 0.7 per cent at US$1,835.96 by 2.59am GMT.

Even the Malaysian ringgit, which was heavily sold as the country entered a fresh lockdown on Tuesday, was able to creep higher to 4.0400 per United States dollar.

Last week, gold prices corrected sharply on cues from the worldwide market where traders increased their short position as seen by the open interest. With U.S, yields shooting higher, it really does two things: "1) it encourages more inflow into the US buying USA rate products and 2) very sharply moving yield levels tend to not be good for high beta EM FX".

However, strong demand at a $38 billion 10-year auction overnight and remarks from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George have allayed some of those concerns ahead of a busy schedule of Fed speakers.

"The upward correction in the dollar index looks to be over and the downtrend has resumed", ANZ analysts said in a note.

Later on Wednesday Reserve Bank of St. Louis President James Bullard is due to participate in a discussion on monetary policy at a Reuters Next Virtual Forum at 1430 GMT.

Investors also took note of Federal Reserve (Fed) vice-chair Richard Clarida's comments on Friday that the United States economy was headed for an "impressive" year, helped by coronavirus vaccines and potential for larger government spending.

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